July’s inflation figures may dampen speculation that the Bank of England will follow in the Fed’s footsteps and cut interest rates. With stronger pay growth and the fall in the pound likely to ensure that inflation is above target in 2020, we think that it is only in a no deal Brexit that the MPC would cut rates.
Back above the 2% target
- July’s inflation figures may dampen speculation that the Bank of England will follow in the Fed’s footsteps and cut interest rates. With stronger pay growth and the fall in the pound likely to ensure that inflation is above target in 2020, we think that it is only in a no deal Brexit that the MPC would cut rates.
- The rise in CPI inflation from 2.0% to 2.1% confounded the consensus forecast of a fall to 1.9% and the Bank of England’s August projection for a drop to 1.8%. It was also a touch above our forecast of 2.0%.
- As expected, fuel prices pushed down on CPI inflation. Indeed, prices at the fuel pumps dropped by 1.1% m/m, compared to a 0.5% fall in July 2018. Food inflation ticked down from 1.6% in June to 1.4% too. (See Table 1.) The main surprise was the increase in the core measure (excluding food, alcohol and energy) from 1.8% to 1.9%, thanks to rises in one or two of the core sectors, including hotel rooms and computer games, as well as smaller summer clothing discounts this year compared to 2018. Clothing inflation rose from -0.5% to 0.4%, taking it to its highest since June 2018.
- Admittedly, inflation may not stay above the 2% target for long. The pre-announced utility price falls will probably push inflation back down to 1.9% in October. Fuel price inflation probably has further to fall too, as retailers pass on the latest drop in oil prices.
- Beyond that, though, the strength in pay growth and the fall in the pound should ensure that inflation spends most of its time above the 2% target in 2020. Indeed, our measure of core services inflation ticked up from 2.8% to 2.9% in July, and the recent strengthening in pay growth suggests further rises are in store. (See Chart 1.) The producer price figures also provided tentative evidence that cost pressures are picking up. Factory gate price inflation increased from 1.6% to 2.0%, which should feed into the core rate of inflation in time.
- In short, the figures will do little to affect the Bank’s view – expressed at its meeting earlier this month – that interest rates will most likely be raised if there is a Brexit deal and global growth recovers. It is only in a no deal scenario that we think the MPC would cut rates, perhaps from 0.75% to at least 0.25%.
Chart 1: Average Earnings & Core Services Inflation
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, email@example.com