There was a narrow upside surprise to CPI yesterday and we think that the August MPC meeting still appears to be a "finely balanced decision".
- For the second month in a row headline inflation has come in broadly in line with BOE expectations but again there has been an unfavourable split with services CPI coming in higher than both consensus expected and even more above the BOE’s May MPR forecast than previously (0.55ppt above forecast, up from 0.42ppt above forecast last month).
- However, rather than being a broad based increase (as was the case in the May data), the additional upside surprise to June was driven entirely by accommodation prices. Given the survey date did not coincide with any Taylor Swift concerts it is hard to really pin the surprise on her Eras tour, but the narrowness of the surprise should reduce its policy impact, in our view.
- We still consider a cut at the August MPC meeting to be very much “finely balanced” (to borrow a phrase from the June MPC Minutes). Market pricing adjusted from around a 48% probability of a cut to around 35% probability on the upside surprise – which is only a movement of around a 4bp move – and probably justified if we are right in that private sector regular wage growth looks likely to surprise to the upside in upcoming data. However, on this inflation print in isolation, we think that there isn’t enough to change any individual MPC members’ voting intentions.
- Indeed, as the chart shows there were only really two notable upside contributors – accommodation and transport (of which most of the move was driven by second hand car prices). This was largely offset by a downside surprise to clothing and footwear (which the ONS attributes to timing changes of sales – so therefore could be reversed next month) as well as further downside to food, alcohol and tobacco and communication.
- We look at the drivers in more detail and summarise 14 sellside analyst reviews.
For the full PDF see:
MNI UK Inflation Insight - July 2024 Release.pdf
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