UK inflation to fall to lowest level since March 2022 but Bank of England still tipped to hike interest rates

UK inflation is on course to drop to its lowest level in over a year, but lingering underlying price pressures will heap expectation on the Bank of England to keep on hiking interest rates, new figures out this week are tipped to show.

The rate of price growth in Britain is expected to have dropped to 8.2 per cent in June, down from 8.7 per cent in May, the City expects numbers from the Office for National Statistics (ONS) on Wednesday to unveil.

That would mark a reversal from May when the cost of living remained unchanged despite the Bank and analysts expected it to ease. It would still be higher than the Bank’s 7.9 per cent forecast made back in May.

However, there is expected to be signals in the ONS’s latest inflation snapshot that prices are proving resistant to Bank Governor Andrew Bailey and co’s 13 successive interest rate rises.

Core inflation – which removes volatile food and energy price movements and is seen as a more accurate gauge of price dynamics – is forecast to have held steady at 7.1 per cent in June.

Services inflation, which the Bank monitors closely to inform its interest rate decisions, is also likely to be very high at around seven per cent.

High underlying inflation will concern members of the nine-strong monetary policy committee as it suggests price increases are being fuelled by local factors. 

As a result of those underpinning dynamics, the Bank is expected by the City to lift borrowing costs from their current level of five per cent to a peak of around 6.25 per cent.

Softening petrol prices and lower energy bills will nevertheless bring down headline consumer price inflation.

“Movements in petrol prices make it almost a given that CPI inflation fell in June. According to government data, prices at the petrol pumps fell one per cent between May and June 2023. This compared with a near-11 per cent increase in the same period last year,” analysts at Oxford Economics said.

“Our hunch is that there won’t be a third CPI inflation shocker in a row,” Capital Economics said.

Elsewhere in a busy week for traders, ONS figures on Friday are likely to show the warmer weather in June engineered a 0.1 per cent monthly increase in retail sales for the month. That would mean they have dropped 1.5 per cent over the last year though.

“After a slight bump up in May, we see further upward momentum in June. Why? Very simply, we expect warmer weather to boost retail spending,” Sanjay Raja, senior economist at Deutsche Bank, said.

On the same day, new public finances numbers will probably show another increase in government borrowing, up to £22bn in June from £20bn in May, mainly due to very high debt interest expenditure caused by high inflation. A big chunk of the government’s debt stock is tied to the retail price index, which is above 10 per cent.

The recent sharp rise in mortgage rates is tipped to have corroded consumer confidence slightly in July, with GfK’s long standing index expected to drop to minus 26 points from minus 24 points.

On the corporate front, Wall Street firms lead the docket as US earnings seasons ramp up. 

Topping the billing will be financials from investment banking titan Goldman Sachs on Wednesday. Traders will be closely watching to see if it matched rival JP Morgan’s record profits in the second quarter of this year.

In London, the FTSE 100 punched in a decent performance last week, up just over two per cent to close at 7,434.58 points. It is down in 2023 so far.