The UK inflation reading increases the chances of a 25 bp rate hike in August

Inflation in the UK fell more than expected in June, partly thanks to an encouraging fall in the services sector CPI. The August meeting of the Bank of England will be imminent, but the latest data make a 25bp rate hike more likely than a second 50bps rate hike.

Inflation slowdown

In the morning there was good news about inflation in the UK. Main CPI fell back to 7,9%, below the consensus and is almost a whole percentage point lower than in May. Much of this can be attributed to gasoline and diesel prices, which fell by 2,6% over the month - a marked difference from the same period last year, which saw an increase of almost 10% due to the ongoing effects of the war in Ukraine. But the marked slowdown in food price inflation was also encouraging.

These prices are up 0,4% over the month, which is what it looks like slowest month-on-month growth from the beginning of 2022. This is a trend that should continue, given that producer prices for food products are currently falling on a three-monthly annual basis (seasonally adjusted).

For BoE service inflation is paramount, however, and the good news continues here as well. CPI in the services sector fell from 7,4% to 7,2%, contrary to both Bank of England's forecasts that it will remain unchanged in the near future.

Bank of England ahead of an important decision

While stubbornly high wage growth will ensure that the way back to the destination will be long, research has shown that price increases among service sector companies (particularly hospitality) can be largely attributed to higher energy prices. Now that gas prices are dramatically lower, the incentive for companies to continue to raise prices as aggressively should diminish. ONS surveys.

Will this be enough to convince the Bank of England to raise interest rates by 25 bp in August? The bank will also be looking at recent payroll data at this point, which was better than expected but was accompanied by data showing re-cooling in the labor market and improving labor supply. The risk is that the Bank of England will use similar logic as it did in June. This may mean that if he expects another hike in September, he might as well decide for a bigger hike of 50 bp in August.

After today's inflation reading in the UK, the pound sterling loses a lot GBP/USD pair falls below 1,30.