Monetary Policy & Inflation | Rates | UK
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- UK headline inflation ticked back up in headline and core and remained stable in services. This was a broad beat versus consensus and slightly above MPR expectations.
- Beats in food appear to be beef and dairy related. But we would not write this off as transitory given sector inflation has been rising consistently YoY since 2024.
- BoE will watch this beat’s impact on consumer inflation expectations.
- The beat in accommodation prices is less concerning (it remains suppressed YTD), as do wage-intensives services sectors more broadly.
- Tomorrow’s labour market data will be more important for BoE easing in our view – we expect continued signs of loosening, albeit with PAYE job losses likely pared in revisions.
Market Implications
- We still expect the BoE to cut more than priced, and see continued value being long SONIA Z6, targeting 97.0.
- We still see value in being long 10Y UK linkers, targeting 0.2% yield.
June Inflation Beats but Labour Market More Important
UK YoY inflation jumped back in June, with headline rising to +3.6%, core at +3.7% and services (stable) at +4.7%. This was an overshoot across the board versus consensus. (Chart 1). Core inflation saw a rise versus typical MoM (Chart 2).
The beat came in food (particularly cow related) and alcohol prices, as well as in accommodation prices (although this remains suppressed YTD).
The stronger-than-anticipated data is unlikely to greatly change the MPC’s mood. It is only a single month’s release, but they will watch food prices closely. Tomorrow’s labour market data is more likely to drive their sentiment regarding how much easing is needed.
We think the market continues under-pricing the BoE’s terminal rate and as such we still like being long SONIA Z6 in our model portfolio (target: 97.0) as well as long linkers (10Y target 0.2% yield).
Food for Thought
MoM inflation breadth rose in June, remaining elevated historically (Chart 4). Food, alcohol and accommodation (within restaurants and hotels) saw the biggest beats:
- Food & Non-Alcoholic Beverages (+0.3% MoM). YoY inflation has been consistently rising since the lows of mid-2024 (Chart 6). Households weight the sector heavily in regular consumption so it could feed through into inflation expectations. Big drivers seem to be cow-related products, with beef and veal prices +20% YoY, whole milk prices +8% and butter prices up 20%.
- Beverages/tobacco (+0.5% MoM). A rise in alcoholic beverages drove this, particularly beer prices (+6.3% YoY). This is less likely to cause concern than food prices.
- Catering/accommodation (+0.8% MoM). A slight beat versus typical MoM, driven by another sharp rise in accommodation prices. However, the rate continued declining YoY, though it could be volatile on account of last year’s Taylor Swift concert impact. The rate remains lower than typical YTD, after strong discounting in Q1 (Chart 7).
Services Inflation Remains Steady
Services inflation remained steady at 4.7% YoY, despite BoE and market expectations for a drop (Chart 8).
We separate the effects of regulated/index-linked services inflation from non- and wage-intensive services inflation (Chart 9).
- Momentum in wage-intensive services inflation ticked up again after the recent fall, as expected. The trend normalisation in momentum since 2022 appears intact, and we expect the rate returns to typical in H2.
- Momentum in regulated services inflation stabilised in June. We had expected this to pare more.
- Momentum in non-regulated, non-wage-intensive services inflation is slowly declining but remains elevated.
Despite the one-off beat in June, overall, services inflation continues showing normalisation in wage-intensive sectors. This should be the BoE’s biggest focus. July’s inflation will be telling to see whether the regulated price resilience is persistent.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of Macro Hive. This includes providing or reproducing this information, in whole or in part, as a prompt.)