MNI UK Inflation Preview - August 2023: Services inflation key

• The August UK inflation print will be released publicly on Wednesday at 7:00BST and will provide the final piece of data ahead of the MPC policy decision which will be announced Thursday.
• The majority of analysts expect headline inflation to tick up in August from the 6.8%Y/Y print seen in July. The Bloomberg consensus looks for an increase to 7.1%Y/Y in headline inflation, although we note that only half of the analyst previews that we have read look for an increase this high (with none having a base case of higher). This means that the median from the previews we have read is 7.05%Y/Y with the mean even lower at 7.03%.
• However, the key number for this week’s MPC decision is likely to be services inflation. The BOE expected a 7.2%Y/Y increase in August while the median expectation from the analyst previews that we have read is 7.3%Y/Y (a tenth higher than the Bank’s expectation). There is also an upward skew here with only 1/11 analyst expecting a 7.2%Y/Y rise but 3/11 analysts expecting a print of 7.4%Y/Y (which would be unchanged from July) while 2/11 analysts look for an acceleration in services inflation to 7.6%Y/Y.
• We think that a print of 7.4%Y/Y in services inflation would be enough to nudge market pricing up to at least 22bp and a print of 7.6%Y/Y as seen by a couple of analysts may even see markets price in a small probability of a 50bp hike this month.
• However, if services inflation was to come in at 7.2%Y/Y in line with the Bank’s own forecast, we still think that the MPC would go ahead with a hike, but market pricing would likely fall back further, possibly to somewhere in the region of 15bp for the September meeting. If services inflation came in even softer than 7.2%Y/Y then, absent the move having been driven by some strange temporary factors, we would expect markets to be pricing in closer to a 50/50 probability of a September hike.

UK_CPI_Preview_2023_08.pdf