Closing post
Time to recap, after a potentially pivotal day in Britain’s fight against inflation.
UK inflation fell further than expected in June to 7.9% amid a sharp fall in petrol prices, raising hopes that the Bank of England may not raise interest rates as high as feared in the months ahead.
The Office for National Statistics said the annual inflation rate as measured by the consumer prices index resumed a downward path after unexpectedly sticking at 8.7% in May.
The drop exceeded City forecasts for a decline to 8.2%, and took inflation to its lowest since March 2022.
Financial markets responded by betting that the Bank of England would no longer drive interest rates above 6% early next year. They are now expected to peak at around 5.75% around the end of this year.
Markets also predicted that the central bank would introduce a more modest quarter-point rise in borrowing costs at its next policymaking meeting in August, instead of a tougher half-point increase from the current level of 5%.
Sanjay Raja, Deutsche Bank’s chief UK economist, says:
The probability of a quarter point hike is higher, following the June CPI miss.
ING’s James Smith said that we finally have good news on UK inflation.
Here’s a breakdown of the key price changes:
Shares rallied strongly in London, with the FTSE 100 posting its biggest points gain of the year as traders took confidence that interest rates will peak lower than feared. Housebuilders led the rally.
UK government bonds also rallied, which could push down the cost of mortgages in the coming days.
The pound tumbled by 1.5 cents against the US dollar.
The drop in inflation, from 8.7% in May, could make it easier for Rishi Sunak to hit his target of halving inflation this year…
Bank of England deputy governor Sir Dave Ramsden has warned, though, that inflation remains “much too high”.
Warning that further interest rate rises are coming, Ramsden said:
CPI inflation has begun to fall significantly but remains much too high.
The MPC has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling.
In other news…
Cross-Channel transport bosses have warned MPs that “time is running out” for the UK to prepare for the EU’s entry/exit system (EES).
Australia’s Macquarie Group has tightened its grip on the UK’s energy sector today by buying another 20% of National Grid’s UK gas transmission and metering business.
Oil giant BP has been fined £650,000 over health and safety failings after a worker fell through an open grating on an offshore platform into the sea and died.
The UK’s competition regulator has provisionally cleared semiconductor designer Broadcom’s $69bn deal to buy cloud computing firm VMware.
Homebuilders clock best day since 2008
UK homebuilders have racked up the biggest percentage gain in their shares since 2008, after signs of slowing inflation helped to bolster hopes that UK interest rates will not rise as high as once thought.
Beaten down homebuilders surged 7.0%, Reuters reports, as investors cheered data showing British inflation fell to a more than expected 7.9% in June, its slowest pace in more than a year. Economists were forecasting a rise of 8.2%.
Elsewhere today, Tata Group, the owner of Jaguar Land Rover, confirmed it will invest £4bn to build an electric car battery gigafactory in the UK, in a major boost to the British automotive industry.
The factory is expected to be sited in Somerset and to bring 4,000 new jobs to the area.
It will become one of Europe’s largest battery cell manufacturing sites when it starts production in 2026, according to Tata Sons, the holding company behind the Indian conglomerate.
Rishi Sunak has welcomed the news, saying:
“Tata Group’s multibillion-pound investment in a new battery factory in the UK is testament to the strength of our car manufacturing industry and its skilled workers.”
BoE's Ramsden: Inflation remains much too high
Bank of England deputy governor Sir Dave Ramsden has just declared that UK inflation “remains much too high”, after it fell to 7.9% in June.
In a speech at the Bank this afternoon, Ramsden pointed out that its Monetary Policy Committee (on which he sits) had predicted in May that headline CPI would fall sharply from April 2023 onwards as energy prices ease.
Ramsden says:
That is what we have seen since, with CPI inflation falling from 10.1% in March to 8.7% in April and to 7.9% in June.
The Bank’s inflation target is 2%, though.
Ramsden warns that the Bank will look for signs of persistent inflationary pressures in the economy, including wage growth and services price inflation.
He says:
CPI inflation has begun to fall significantly but remains much too high. The MPC has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling.
Updated
Time "running out" to prepare UK for EU's entry/exit system, MPs hear
Cross-Channel transport bosses have warned MPs that “time is running out” for the UK to prepare for the EU’s entry/exit system (EES), which threatens to further slow down border processing times for passengers and hinder the flow of trade.
The scheme, which will require new biometric identification of all foreign citizens entering the EU to be taken at the border by immigration officials, has been delayed until 2024, with implementation now likely after the Paris Olympics.
The system has been designed for airports and not those in with cars and coaches, executives from Eurotunnel and the Port of Dover told the Commons European Scrutiny committee.
Doug Bannister, chief executive of the port of Dover, said that the process as currently designed “could make it two to four times as long to go through the border as today”, adding:
“If unresolved that could result in significant queueing.”
Passengers have already been told to expect long waits this weekend due to post-Brexit stamping of passports.
John Keefe, corporate affairs officer at Eurotunnel, said:
“[the] scheme was designed for comfortable airports in EU territory.. .where it struggles is where cars drive through large open spaces in all weathers and all times, and data capture has to look at people deep inside a vehicle.”
Bannister said one third of all trade between EU and the UK came through the port and capacity depended on “how quickly can we get things through. This is not just a commercial thing for us – this new regulation has a large strategic impact on the health and prosperity of the nation.”
He urged the government to come to an agreement with France and to lobby the EU to ensure that rules and technology allowed biometric data to be taken remotely, rather than at the port, adding:
“We need to know that the app is coming in, and we need to be given the time to test that, and to ensure we can register that remotely. We need to know now. We’re running out of time. It’s an urgent issue.”
Keefe cited a study by Logistics UK that said a day of disruption at the Channel equated to a £250m loss to the UK economy.
The peak in core UK inflation now looks like it may be behind us, predicts Sanjay Raja, Deutsche Bank’s chief UK economist, after it dropped to 6.9% this morning from 7.1%.
Downward momentum is gathering pace. Easing price pressures – particularly in core goods, food and energy inflation – should raise some downside risk through summer. As energy prices fall, and food inflation normalises, the likelihood of non-linear (downward) effects into the ‘core’ CPI basket will only rise. And survey data – as highlighted by our DB Survey Price Tracker – point to further downward momentum.
Where to now? We still think it will be some time before CPI settles at the Bank’s 2% mandate (early 2025). But there is good news for Government: amidst sticky services inflation, headline CPI is now on course to drop below 5% y-o-y.
Today’s data will complicate the August decision for the Bank of England’s MPC, Raja adds:
The probability of a quarter point hike is higher, following the June CPI miss.
After changing our call for August, noting that a 50bps looked more likely than not following the strong wage data, we now see a 50bps hike as a coin toss. We will be re-evaluating our call in our BoE preview next week.
The pound is still sharply lower tonight, down one and a half cents at $1.288.
John Higgins, chief markets economist at Capital Economics, argues that sterling could fall further against the US dollar in future:
Despite today’s big reaction in markets in the UK to better-than-expected inflation news, we still think investors are overestimating the peak in interest rates there and underestimating how much monetary policy will be eased in 2024 and beyond.
Indeed, even though we’ve nudged up our near-term forecast for Bank Rate, we now project that the 10-year Gilt yield will fall a bit more by the end of 2023 than we previously thought.
And we still expect cable to come under extra pressure, as appetite for risk wanes.
[Cable is the pound-dollar exchange rate].
FTSE 100 posts biggest points gain of the year
The London stock market has closed…. and Britain’s FTSE 100 has recorded its biggest points gain of the year, just.
The blue-chip index has closed 134.5 points higher at 7,588 points, a jump of 1.8% today, and its biggest points gain since last November.
That’s one point more than its previous best day of 2023, last Wednesday (when the FTSE 100 gained 133.5 points, or 1.83%, after US inflation fell to 3%).
Housebuilders were among the big risers, along with financial services group Hargreaves Lansdown (+8.7%) which reported a rise in new business this morning, and warehouse operator Segro (+7%).
🔔 European Closing Bell 🔔
— PiQ (@PriapusIQ) July 19, 2023
**EUROPE'S $STOXX 600 UP 0.3%
**GERMANY'S $DAX FLAT
**BRITAIN'S $FTSE 100 UP 1.9%
**FRANCE'S CAC 40 $FCHI UP 0.2%
**SPAIN'S $IBEX DOWN 0.1%
**EURO STOXX INDEX $STOXXE UP 0.1%
**EURO ZONE BLUE CHIPS DOWN 0.1% pic.twitter.com/8UqSOnROs1
The UK government has proposed draft rules that would force big companies to demonstrate they are profitable enough to pay dividends or make other payouts.
The move draws lessons from the collapse of builder Carillion in 2018.
The business and trade department said the draft rules, which need approval from parliament, would come into force at the start of 2025 and apply to companies with at least 750 employees and an annual turnover of £750m or more.
A strike by train staff in the RMT union will severely affect rail services across Great Britain on Thursday, heralding the start of 10 days of transport disruption and delay around the peak summer holiday getaway weekend.
About 20,000 RMT members at 14 train operators will strike for 24 hours on Thursday and again on Saturday, coinciding with the end of a week-long overtime ban by train drivers in the Aslef union.
Both unions will also strike next week on the London Underground, all but wiping out tube services for most of the week and spelling heavy congestion on roads.
Road congestion across the country will peak on Friday and Saturday, as most schools in England and Wales break up for summer. Cross-Channel ferry passengers have been warned of long queues at Dover. Some airport staff are also expected to strike the following weekend….
Severn Trent may soon be able to charge almost 5 million customers an extra £60m in total on their water bills as a reward for exceeding its own customer service targets.
The water firm, which is listed on the FTSE 100, told investors on Wednesday that it was on track to get the multimillion-pound award this year through the water regulator’s incentive plan.
Ofwat’s scheme allows water companies to charge households higher bills as a reward for exceeding their performance targets, but demands discounts for customers if water companies fall short.
Severn Trent is likely to collect the reward from its 4.8 million customers – located in Birmingham and the wider Midlands region – over a number of years to avoid a sudden change to bills.
More, if your mood can take it, here:
BNP Paribas have dampened the mood, by predicting the Bank of England will still vote for another large increase in interest rates, from 5% to 5.5%, next month.
In a research note, they say rates will then peak at 5.75% this autumn.
They argue that the breadth of inflationary pressures eased only marginally, and that the BoE will remain concerned that wages are rising too quickly to meet its inflation target.
BNPP say:
The improvement in June’s UK inflation data is less impressive than it appears at face value, and we still think the Bank of England will raise rates by 50bp at the Monetary Policy Committee meeting in August.
Signs of easing inflationary pressures should take some of the pressure off the MPC, but one downside surprise does not negate the previous string of upside surprises.
We still see the BoE reaching a terminal rate of 5.75% in September.
Updated
NIESR, the economic thinktank, have warned that we have yet to see a significant movement in underlying inflationary pressures in the UK economy.
Paula Bejarano Carbo, associate economist at NIESR, explains:
“Annual CPI inflation rose by 7.9 per cent in June, down from 8.7 per cent in May, driven by falling prices for motor fuel which was partially offset by rising prices in food.
Measures of underlying inflation also eased slightly in June: for example, core CPI and services inflation both fell from 31-year highs of 7.1% and 7.4%, to 6.9% and 7.2%, respectively.
Though these are all welcome falls, it remains concerning that these measures of underlying inflationary pressures continue to plateau around 7%, well above the Bank of England’s target of 2%.”
⚡️Welcome fall in headline rate despite little movement in underlying measures 📉
— National Institute of Economic and Social Research (@NIESRorg) July 19, 2023
Our latest #CPI Tracker is out - Read it here ⬇️#inflation #UKeconomy#EconTwitter https://t.co/VTCbQRFMPj pic.twitter.com/xTzZZmnEQj
The pound is losing more ground against the US dollar as the afternoon moves along.
Sterling is now down 1.5 cents, or 1.2%, at $1.2883, as traders reassess how high UK interest rates will need to go to bring down inflation.
Britain's banks too slow in passing higher interest rates to savers, says watchdog
UK financial regulators have told MPs that Britain’s banks are not passing on higher interest rates to savers fast enough.
Financial Conduct Authority chief executive Nikhil Rathi told parliament’s Treasury Select Committee that:
“The pace has simply not been fast enough,”
Challenged about some of the “poor” rates available on easy access accounts from major banks, Rathi said there is a “long-standing” position that customers get the best rates from the building societies.
Digital and challenger banks tend to be close behind, while high street banks offer the poorest rates, he said.
The FCA isn’t a price regulator, Rathi points out.
But it does expect savings rates to improve as a new duty forcing banks to provide good outcomes for consumers comes into force.
FTSE 100 on track for best day of 2023
Britain’s blue-chip share index is on track for its best day of the year, as the fall in UK inflation in June boosts confidence in the City.
The FTSE 100 index is now up 151 points, or 2%, at 7606 points – a one-month high.
That would be its best day since last October.
Hopes that UK interest rates will peak below 6% are spurring a strong rally in housebuilders, with Persimmon (+9.5%), Taylor Wimpey (+6.6%) and Barratt Development (+6.5%) in the top risers.
🇬🇧 UK REAL ESTATE INDEX UP 5.2%, SET FOR BIGGEST ONE-DAY JUMP SINCE FEBRUARY 📈
— FMN - FastMarketNews (@FastMarketNews) July 19, 2023
🇬🇧 UK HOMEBUILDERS INDEX SET FOR BIGGEST ONE-DAY GAIN SINCE NOVEMBER 2008, LAST UP 6.6% 📈
The money markets now believe the Bank of England is more likely to raise interest rates by a quarter-point next month, rather than by half a point as previously expected.
Looking further ahead, rates are expected to peak around 5.75%, rather than over 6%.
A whole repricing of UK interest rate expectations takes place as short-end Gilts rally following soft UK CPI figures. Markets now pricing +0.28% increase on Aug 3rd vs +0.44% yesterday. Terminal rate now seen reaching 5.8% compared to an expectation of nearer to 6.25% yesterday.
— Saxo UK (@SaxoUK) July 19, 2023
UK government bonds continue to rally (see earlier post), pulling down the yields used to price fixed-rate mortgages.
The drop in UK inflation to 7.9%, from 8.7%, has also sparked a strong rally in the UK-focused FTSE 250 index.
The FTSE 250, which contains smaller companies, is up 3.59%, its strongest day since February.
Investors are hoping that UK inflation has peaked, and will fall back towards levels seen in other major economies.
Danni Hewson, head of financial analysis at AJ Bell, says:
A further decline in inflation for July could really get the ball rolling for UK equities and lift them out of the mud. While the FTSE 250 is in party mode today, the rally only puts the index back to levels last seen in June.
“Housebuilders had been heavily sold off due to fears a sharp rise in interest rates would destabilise the housing market. While that’s certainly in motion, with plenty of people struggling with higher mortgage rates and a slowdown in property transactions, the valuations of housebuilders were effectively pricing in a deep rut.
Today’s inflation news has spurred investors with an appetite for risk to go fishing for bargains in the space in the hope that property market won’t experience a severe collapse.”
Updated
Larry Elliott: Rishi Sunak’s inflation targets no longer seem so hard to hit
Rishi Sunak and Jeremy Hunt will be breathing a big sigh of relief at the latest inflation figures, our economics editor Larry Elliott writes.
On the face of it, there is not a great deal to crow about. At 7.9%, the annual increase in the cost of living as measured by the consumer prices index is still running at four times the government’s 2% target.
But for the first time in a while, inflation has come in below the level expected by the financial markets. That goes for headline inflation and core inflation, the measure that excludes volatile items such as food and fuel, and which came down from 7.1% to 6.9% in June. The City had thought headline inflation would drop to 8.2% and that core would remain unchanged.
Inflation in the service sector also fell last month, from 7.4% to 7.2%. That is significant not only since services make up about four-fifths of the economy’s total output but also because what is happening to the price of services is seen by economists as a guide to inflation generated by the domestic economy.
Macquarie takes further control of Britain’s gas network
Australia’s Macquarie Group has tightened its grip on the UK’s energy sector today.
National Grid has sold a further 20% stake in its UK gas transmission and metering business to a consortium led by Macquarie Asset Management.
The sale is on the equivalent financial terms to the previous sale of 60% of National Gas to the Macquarie-led group, which was completed in January 2023
Martin Bradley, European head of infrastructure real assets at Macquarie, said the deal “underlines our commitment to National Gas and the critical role it plays in the UK’s energy system”.
Bradley added that Macquarie aspires to acquire the rest of National Gas “in due course”.
National Grid plans to use the £700m proceeds for general corporate purposes including repaying its debt.
Macquarie already owns a string of UK infrastructure assets including Southern Water, and in May it posted record profits after a boom in its commodities trading division. No wonder it’s been dubbed the “millionaire’s factory”, thanks to its bumper payouts to senior staff.
Macquarie’s has deep ties to the UK, having been created as a subsidiary to the British merchant bank Hill Samuel & Co in 1969.
It has faced criticism over its ownership of Thames Water, which was steadily loaded up with debt before Macquarie sold its final stake in the water operator in 2017,
Nation’s savings ‘may have lost as much as £113bn over past year in real terms’
Soaring inflation, and the banking sector’s tardiness in raising savings rates, could have wiped up to £113bn off the nation’s savings over the past year in real terms, analysis suggests.
PA Media has the details:
The analysis by investment platform AJ Bell was released after Office for National Statistics (ONS) said the Consumer Prices Index (CPI) eased to 7.9% last month, down from 8.7% in May and its lowest rate since March 2022.
Laura Suter, head of personal finance at AJ Bell, said: “Even though inflation has fallen today, savers are still being pummelled by high inflation and lower returns on savings.
“Although interest rates have risen considerably over the past year and a half, savers still lost money in real terms thanks to double-digit inflation for much of that period.
“Over the past year the average saver with £1,000 in an easy-access account will find it’s now worth £938 in real terms, having got an average of 1.18% interest over that period. The top-rate easy-access accounts would have paid more over that time, but nowhere near current inflation of 7.9%.
“Based on the £1.81 trillion that Brits have in savings accounts, it means the nation’s savings could have collectively lost as much as £113 billion over the past year in real terms, based on current inflation and assuming savings were earning the average easy-access rate.
“Although some of that money will have been in fixed-rate accounts earning higher interest, a large proportion will also have been in accounts earning zero or minimal interest.
“We know that £250 billion of savers’ money is sitting in accounts earning no interest, with that money alone losing £18 billion in real terms.”
June’s drop in UK inflation is continuing to drive shares in UK housebuilders higher.
Persimmon are now up almost 9%, with Barratt and Taylor Wimpey both 6% higher, on hopes that interest rates will not be raised as sharply as previously feared.
Commercial property developer Land Securities are also surging, up 8.5%.
BP fined £650,000 after offshore worker's fall death
Oil giant BP has been fined £650,000 over health and safety failings after a worker fell through an open grating on an offshore platform into the sea and died.
Sean Anderson, 43, sustained fatal injuries when he fell through the grating on the lower deck of BP’s Unity installation on September 4 2014.
Following an eight-day trial at Aberdeen Sheriff Court, BP Exploration Operating Company Ltd was found guilty of a health and safety breach.
During the trial, the prosecutor led evidence showing that the company had failed to have suitable and sufficient control measures in place in respect of open gratings on the lower deck.
Debbie Carroll, who leads on health and safety investigations for the COPFS (Crown Office and Procurator Fiscal Service), said BP Exploration Operating Company Ltd could have done more to address the risks.
She explained:
“Sean Anderson’s death was entirely foreseeable and could have been avoided if BP had taken all reasonably practicable precautions.
“His death and the risk of fatal injury to which others were exposed cannot be understated.
“There were serious deficiencies in the safety arrangements adopted around the management of open gratings which BP should have identified.
A BP spokeswoman said:
“We acknowledge the outcome of the court proceedings.
“This was a tragic incident. While we know nothing can be said to change the pain felt by Sean Anderson’s family and friends, our deepest condolences remain firmly with them to this day.”
BP fined £650,000 after offshore fall death https://t.co/wi2r0HicGf
— BBC News (UK) (@BBCNews) July 19, 2023
Over in the US, the housing market appears to be cooling fast as high interest rates hit the economy.
The number of new house-building starts fell by 8% in June, according to new US Commerce Department data that shows fewer spades broke ground on housing projects last month.
New permits for house-building projects fell by 3.7%, suggesting the recent increase in US interest rates and drop in house prices have cooled demand.
⚠️ US building permits - probably need a magnifying glass to see any recent housing boom $USD pic.twitter.com/kV63OgpilU
— Viraj Patel (@VPatelFX) July 19, 2023
Over on Wall Street, Goldman Sachs has reported a sharp tumble in profits.
Goldman’s net earnings dropped to $1.07bn for the second quarter of this year, down over 60% from the $2.78bn recorded in Q2 2022.
Revenues at its investment banking arm and its market making division both fell, compared to a year ago, while commissions and fees also dropped.
Goldman’s results were marred by an impairment of $504m against GreenSky, a fintech lender which it bought in 2021.
Annualized return on common equity – a key measure of bank profitability – fell to 4.0%, which Bloomberg says is the worst among the top US banks.
It was Goldman’s lowest quarterly profit since the second quarter of 2020, and one of its weakest quarters under chief executive officer David Solomon, Bloomberg adds.
Solomon, Goldmans’s disc-spinning CEO, struck an upbeat tone, saying:
“This quarter reflects continued strategic execution of our goals.
Global Banking & Markets delivered solid returns in an environment with cyclically low activity levels and we remained #1 in completed M&A – a testament to our world-class client franchise. Asset & Wealth Management produced record AUS, record Management and other fees and record net revenues in Private banking and lending.
I remain fully confident that continued execution will enable us to deliver on our through-the-cycle return targets and create significant value for shareholders.”
It's seems 🎵 DJ is not helping Goldman Sachs as profit plunges and posts one of its weakest quarters under their chief
— Olumide Adesina (@TokunboAdesina) July 19, 2023
Updated
The drop in UK inflation last month is “potentially a big turning point” in the UK inflation story, hopes James Lynch, fixed income investment manager at Aegon Asset Management.
After what seemed to be endless upside surprises and being perceived as having a bit of a ‘problem,’ today’s inflation print actually came in lower than the vast majority of economist predicted: 7.9% v 8.2% expected.
Lynch adds, though, that wages are “currently too high for the Bank of England’s liking”, currently rising by around 7%.
However, there are signs of loosening in the labour market, he adds:
With growth stalling around 0% and the fall in inflation to come, it is difficult to see this moving higher at least.
For the immediate policy implications of this release, no doubt expectations for the Bank Rate will need to be moved lower. There was talk of 50bps or even what was needed for a 75bps move at the next meeting.
It is now much more likely a 25bps move will happen on 3rd August to take the Bank Rate to 5.25%. Beyond that, it really will be data dependent.”
What does the UK’s falling inflation rate mean for you?
Here’s a breakdown of what the fall in UK inflation, from 8.7% per year to 7.9%, means in practice:
The pound has continued to slip against the US dollar, and is now down 1% at $1.291, a one-week low.
“Sterling dropped sharply as core inflation finally posted a negative surprise this morning,” says Saxo Bank’s strategy team.
In around six months, we’ll know whether the government has hits its target of halving inflation by the end of 2023.
That would mean CPI falling to around 5.35%, or half the level in November 2022 (10.7%), which was the most recent inflation rate when Rishi Sunak made his pledge (although it’s not completely clear what the government will count as success).
Professor Len Shackleton, editorial and research fellow at the right-wing think tank the Institute of Economic Affairs, reckons the pledge is still optimistic, though:
“Rishi Sunak’s pledge to halve inflation by the end of the year may still be optimistic, but at least there are no grounds for the Bank of England to raise interest rates further.
Nor are there any grounds for panic measures to hold down prices artificially, such as Grant Shapps’ silly initiative to curb supermarket petrol prices.”
Here's how the Government's target to halve inflation in 2023 is looking after June's inflation figures 👇 pic.twitter.com/QfEbU0cCcb
— Ben Chu (@BenChu_) July 19, 2023
Capital Economics, the economic research company, are confident that the peak in UK interest rates is close.
Paul Dales, their chief UK economist, says:
Despite the softer tone of the CPI inflation data for June released earlier today, we have raised our forecast for the peak in Bank Rate. Rather than rise from 5.00% currently to a peak of 5.25%, we now think Bank Rate will peak at 5.50%.
That’s a bit lower than the peaks envisaged by the consensus (5.75%) and current market pricing (5.75-6.00%). The bigger difference is that we think Bank Rate will be cut faster and further than market pricing from the back end of 2024 and in 2025.
The Bank of England will only raise interest rates by a quarter of one percentage point at its next meeting, in early August, predict the European Economic team at Nomura.
They say the BoE’s Monetary Policy Committee (MPC) will welcome June’s drop in inflation to a lower-than-expected 7.9%:
UK CPI inflation eased by more than expected in today’s June print, something we haven’t been able to say for some time.
Encouragingly, the momentum in service prices – something the MPC is watching very closely indeed – also weakened, while upstream producer prices (goods) fell. We think this provides support for our view that the BoE will hike rates by 25bp (rather than 50bp) at its August meeting.
But, Nomura also point out that service sector inflation looks strong:
However, it remains the case that at 0.5% m-o-m the rise in consumer service prices was one of the stronger June prints we’ve seen over the past three decades. Moreover, upstream service prices are running at a quarterly pace of 1.3% q-o-q, which remains around the same strong pace we saw last year. These data highlight the risks for the Bank delivering a 50bp hike next month.
We maintain our view for three more 25bp hikes at the BoE’s August, September and November meetings this year, and do not see rate cuts until the very end of 2024.
High temperatures on the Rhone river are expected to prompt nuclear operator EDF to restrict production at its 3.6 gigawatt (GW) Bugey nuclear plant from this weekend.
Due to grid constraints, production will be at least 1.8 GW and could change according to needs, EDF has said.
Temperatures on the river are seen reaching a peak of just over 23 degreees Celsius later today, over the initial limit of 20C where production restrictions can be imposed.
This is not the first time this summer that rising temperatures have affected EDF’s nuclear operations. One of the plant’s reactors went offline during the Bastille day holiday weekend on July 15 and was reconnected on Monday.
Last August, the company also reduced output at its nuclear power stations on the Rhône and Garonne river.
Rising temperatures restrict EDF’s ability to use river water to cool the plants; there are also rules to prevent the water used to cool the plants harming wildlife when it is released back into the rivers.
CMA clears Broadcom-VMWare deal
Away from inflation, the UK’s competition regulator has provisionally cleared semiconductor designer Broadcom’s $69bn deal to buy cloud computing firm VMware.
The Competition and Markets Authority (CMA) has concluded that the deal would not weaken competition in the supply of critical computer server products.
In March, the CMA raised concerns that the deal could make servers more expensive, prompting an in-depth investigation.
But it has now concluded that it would not make financial sense for Broadcom to make its rivals products work less well (or not at all) with VMware’s server virtualisation.
It also found that there isn’t a danger that Broadcom would see commercially sensitive information from its rivals, which they share with VMware.
Richard Feasey, chair of the independent inquiry panel carrying out the investigation, said:
Computer servers – often using the products of Broadcom and VMware – play a critical role in enabling us to work in the office or at home or to access TV shows or use banking services.
That’s why it’s important we investigate this deal to ensure that UK businesses continue to benefit from competition and innovation in the supply of server components. After carefully considering a broad range of evidence, we have provisionally found that this deal would not harm competition.
Hopes that the upward pressure on mortgage rates could start to ease are building this morning, following June’s drop in UK inflation.
Andrew Montlake, managing director of mortgage brokers Coreco, said:
“I suspect we will see a slight reprieve as swap rates (which lenders use to price their mortgages) ease a touch with the prospect that we are now closer to the top of the interest cycle than thought a few weeks ago.
“The Bank of England must now exercise some restraint.”
Montlake added:
“Whilst this may not yet mean we see a wholesale fall in mortgage rates, lenders should at least now move away from sudden rate hikes and also enjoy a period of calm reflection.”
Britain risks leaving the cost-of-living squeeze with a more “entrenched inflation problem” than other countries, fears Huw Davies, investment manager for Fixed Income – Absolute Return at Jupiter Asset Management.
Davies says:
“The improvement in the inflation picture is welcome after such a long period of bad news. However inflation in the UK is still very high, wage pressures still elevated and the fall in confidence in the BOE to manage the problem is significant.
The feeling is that the BOE has always been uncomfortable about aggressively raising rates given its pessimistic economic outlook, a pessimism that has so far been unwarranted.
Front end pricing in the Gilt market may well fall further, but we suspect that the UK may exit this inflation phase with a more entrenched inflation problem than when we entered it, a longer-term problem for the UK economy that the BOE will have to take some responsibility for.”
The financial markets are now pricing that UK interest rates will peak at around 5.75%.
That would imply three more quarter-point increases in Bank Rate – in August (to 5.25%), September (to 5.5%) and November or December (to 5.75%).
This is quite a downward revision in expectations, as rates had been expected to hit 6.5% next year.
NEW
— Ed Conway (@EdConwaySky) July 19, 2023
Interest rate expectations fall sharply in the UK following lower-than-expected inflation data.
Traders now pricing in a peak for @bankofengland rates of below 6%.
Was near 6.5% only a couple of weeks ago… pic.twitter.com/KqJeXdIrT0
This morning’s drop in UK inflation to 7.9% is good news after months of disappointment, says James Smith, research director at the Resolution Foundation.
But he warns that the battle with inflation is still far from won, with the UK still having one of the highest inflation rates of any advanced economy.
He’s written a detailed thread about today’s inflation report:
Big inflation release today with June CPI inflation falling 0.8 percentage points to 7.9%, this is in the largest 1% of falls on record, and (FINALLY!) a bigger fall than markets expected (8.2%). Also encouraging drops in core and services inflation. A short thread to follow… pic.twitter.com/q9XBcucF8B
— JamesSmithRF (@JamesSmithRF) July 19, 2023
In terms of headlines, let’s start with the good news: today’s CPI release heralds a welcome return to real (i.e. inflation-adjusted) pay growth: median RTI pay growth adjusted for CPI inflation was 0.6% higher than a year ago. This is very welcome news. pic.twitter.com/oyHgarjWSV
— JamesSmithRF (@JamesSmithRF) July 19, 2023
The less good news is that, while UK inflation fell in June, it is still the highest in the G7 (and one of the highest among advanced economies)… pic.twitter.com/fVZGbXddwj
— JamesSmithRF (@JamesSmithRF) July 19, 2023
…if we look at UK inflation relative to the G7 average, the UK is more of an outlier than anytime since 1990s… pic.twitter.com/S17Pa8HfWl
— JamesSmithRF (@JamesSmithRF) July 19, 2023
…and if we look back to before the pandemic, the UK (CPI) *price level* has risen more than all OECD advanced economies except for Iceland. So UK inflation has been higher than for countries we like to compare ourselves to. pic.twitter.com/ZLUEd2kquH
— JamesSmithRF (@JamesSmithRF) July 19, 2023
So whats going on: key point is that around 0.4ppts of the 0.8pppt fall in inflation is accounted for by what is happening to petrol. There is also a welcome drop in the contribution from food. pic.twitter.com/PYgHd1WmiY
— JamesSmithRF (@JamesSmithRF) July 19, 2023
If we zero in on what is happening to fuel prices you can see there have been huge falls in recent months but that prices have stabilised into July. pic.twitter.com/5DGP0Dmanw
— JamesSmithRF (@JamesSmithRF) July 19, 2023
There has been a big, welcome fall in food price inflation - from 18.3% in May to 17.3% in June. This chart shows you that UK food inflation is similar to European countries but still at the top end (and much higher than in the US, where the situation is different). pic.twitter.com/sjRBpeapjX
— JamesSmithRF (@JamesSmithRF) July 19, 2023
But food is the epicentre of the cost of living crisis and food is now making the biggest contribution to overall annual CPI inflation, now overtaking household bills.
— JamesSmithRF (@JamesSmithRF) July 19, 2023
For more on food inflation, see: https://t.co/L0yi6Tr9V2 pic.twitter.com/wt0fmxW3nx
With inflation falling to 7.9% we're now back in line with @bankofengland's May forecast. That means less pressure on the BoE to raise rates... pic.twitter.com/htdHu5BbZv
— JamesSmithRF (@JamesSmithRF) July 19, 2023
Finally, with energy and food price inflation falling back, the welcome news is that inflation for those on the lowest incomes is falling even faster. pic.twitter.com/Rvxx2r3G5g
— JamesSmithRF (@JamesSmithRF) July 19, 2023
Despite the headline inflation rate falling there are still some shocking numbers in today’s data which show just how difficult life is for households, our money editor Hilary Osborne writes.
Nearly all of the food and drink categories monitored by the ONS are still showing double-digit price growth, and there are a couple where the increase is picking up steam.
Sugar is up by 53.6% year-on-year - a huge increase. Crisps, too, are getting more expensive faster - they cost 19.4% than in June last year.
Olive oil prices are still showing a big increase, albeit one slightly lower than last month. They’re up by 44.8%, with warnings of more to come.
UK food price inflation recedes to 17.3% y/y in June - but still running very high 👇 pic.twitter.com/e4LtTO0EVw
— Ben Chu (@BenChu_) July 19, 2023
...Here's UK food price inflation vs the rest of the G7 pic.twitter.com/bQEuGdG8Ls
— Ben Chu (@BenChu_) July 19, 2023
Away from food, car insurance, which is a must for drivers, is up by just over 50%.
The only silver lining is the fall in the cost of fuel - diesel and petrol are both down by more than 20%, but it’s worth remembering that those prices were breaking new records last summer.
Updated
Eurozone inflation confirmed at 5.5%
We’ve just had confirmation that inflation was lower in Europe than in the UK last month.
Eurozone inflation was 5.5% in the year to June, statistics body Eurostat reports, matching its initial estimate, down from 6.1% in May.
Across the wider European Union, the inflation rate was 6.4% in June.
The lowest annual rates were registered in Luxembourg (1.0%), Belgium and Spain (both 1.6%).
The highest annual rates were recorded in Hungary (19.9%), Slovakia (11.3%) and Czechia (11.2%).
As in the UK, food inflation slowed in Europe last month while energy prices fell year-on-year.
Euro area annual #inflation at 5.5% in June 2023, down from 6.1% in May https://t.co/64UeInSVjV pic.twitter.com/dy1UQWRo7W
— EU_Eurostat (@EU_Eurostat) July 19, 2023
But, core inflation in the eurozone rose.
Underlying prices, stripping out energy, food, alcohol & tobacco, rose by 5.5% per year last month, up from 5.3% in May, and higher than the initial estimate of 5.4%.
In the UK, we learned earlier, core inflation fell to 6.9% from 7.1%.
Updated
FTSE 250 on track for best day since February
“Boom! We’ve just seen the strongest daily movement in UK mid cap stocks since February, with the FTSE 250 index initially jumping 3% on news of inflation cooling more than expected in June,” reports says Danni Hewson, head of financial analysis at AJ Bell.
Hewson explains:
The FTSE 100 advanced 1.3% to 7,548 – a positive move but less pronounced than the FTSE 250 because the blue-chip index has less exposure to the UK economy.
“The inflation reading has dampened the outlook for interest rate hikes in the UK, much to the excitement of investors. Two-year gilts fell from 5.079% to 4.842%, sterling fell 0.7% to $1.2937 in the space of 20 minutes and interest rate-sensitive stocks soared on the news.
“Housebuilders, including Crest Nicholson, saw gains of up to 7%, while commercial real estate companies such as British Land were close behind, and UK banks advanced by 2% to 3%.
“Investors are taking the view that if inflation is on a sustained downward path, then the Bank of England might be less eager to keep pushing up interest rates.
The market is desperate for that pivot moment where central banks call the end to the current rate rise cycle.
Inflation rate falls to 7.9% in June -- still slightly slower than expected. But critically, core inflation may have peaked last month, falling to 6.9% in June, down from 7.1% in May. pic.twitter.com/EEGxUrJYrE
— Kate Andrews (@KateAndrs) July 19, 2023
Updated
Stocks are continuing to rally in London, with the FTSE 100 index now up by 1.5% or 112 points at 7,565.
That would be its best day in a week – since US inflation tumbled to just 3% last Wednesday, triggering a global rally.
Here’s a reminder of how market expectations for Bank of England interest rate moves changed once June’s inflation report was released:
Pre-UK CPI release:
— Adam Linton (@Adamlinton1) July 19, 2023
25bps in August @ 42%, 50bps @ 58%
Peak circa 6% in Feb
Post-release:
25bps in August @ 60%, 50bps @ 40%
Peak circa 5.8% Feb
And here’s how the pound reacted:
After 4 consecutive hotter than expected CPI prints, UK CPI comes in LOWER than expected at 6.9%. Expectation was for 7.1%
— Dani Burger (@daniburgz) July 19, 2023
GBPUSD plunges pic.twitter.com/H2Xaszla8S
Updated
Rents soar at fastest rate since at least 2016
The rents paid by UK tenants have increased at the fastest rate since at least seven years, the Office for National Statistics reports.
The ONS says that the private rental prices paid by tenants in the UK increased by 5.1% in the 12 months to June, the largest annual percentage change since its data began in January 2016.
In England, private rental prices increased by 5.1% in the 12 months to June, or by 4.9% if you exclude London (where they rose 5.3%).
Rent rose by 5.8% per year in Wales, up from 5.0% in May 2023, and the highest annual percentage change at least 2010 (when the Wales data series began).
Private rental prices in Scotland increased by 5.5% in the 12 months to June 2023.
The ONS has also reported that average UK house price inflation has slowed, with prices rising by 1.9% in the 12 months to May, down from a 3.2% rise in April.
But prices were £7,000 below the recent peak in September 2022.
Commenting on today’s house price data for May and rents data for June, Aimee North, Head of Housing Market Indices at the ONS, said: (1/2) 💬 pic.twitter.com/tskloOw6sd
— Office for National Statistics (ONS) (@ONS) July 19, 2023
Aimee North continued: (2/2) 💬 pic.twitter.com/G33bdO5Oe4
— Office for National Statistics (ONS) (@ONS) July 19, 2023
Updated
Full story: UK interest rates forecast to rise less sharply after inflation falls to 7.9%
UK inflation fell further than expected in June to 7.9% amid a sharp fall in petrol prices, easing forecasts for how aggressively the Bank of England will need to raise interest rates over the coming year.
The Office for National Statistics said the annual inflation rate as measured by the consumer prices index resumed a downward path after unexpectedly sticking at 8.7% in May.
The drop exceeded City forecasts for a decline to 8.2%.
Financial markets responded to the figures by betting that the Bank of England would no longer drive interest rates above 6% early next year.
Raising further hopes of relief for mortgage holders, markets also predicted that the central bank would introduce a more modest quarter-point rise in borrowing costs at its next policymaking meeting in August instead of a tougher half-point increase from the current level of 5%.
Quilter Investors: UK still a 'drastic outlier' on inflation
Marcus Brookes, chief investment officer at Quilter Investors, has described today’s inflation figures as a “glimmer of light.”
But, Brookes also warned the UK is still a “drastic outlier” among developed countries when it comes to inflation.
He writes:
While the rate of the price rises has dropped to 7.9%, this is still far above where the Bank of England wants it to be before it can even consider a pause in the rate hikes we have become accustomed to.
“Frustratingly, while also beating expectations core inflation is remaining persistently stubborn and refusing to budge significantly. It may be that finally the well-known lags in the effect of interest rate rises are beginning to have an effect, but it still remains very sticky so way too early to begin celebrating.
“Demand has withstood both inflation and the rise in rates, but cracks are appearing, and as more mortgage holders get exposed to the current rates, the economy is likely to be hit as a result.
“This is unfortunately the path that is likely going to have to be taken in order to get inflation back down to target. The Bank of England has raised rates considerably, and shows no sign of slowing down and thus we are probably on a path to recession in 2024.”
UK bond yields tumble on inflation relief
There’s drama in the bond market too this morning, which could benefit those looking to remortgage in the months ahead.
The price of UK government bonds is surging, driving down the yield (or interest rate) on these gilts.
The yield on a two-year UK bond has dropped to 4.8%, down from over 5% last night – and a 15-year peak of 5.5% earlier this month.
That’s significant, as two-year gilts are used to price the cost of fixed-rate mortgages.
Big fall in 2 year Gilt yields in wake over lower than expected June UK inflation figures - down 25 basis points to 4.84%... pic.twitter.com/cCLcOPwBhL
— Ben Chu (@BenChu_) July 19, 2023
Neil Wilson of Markets.com says:
Annual CPI inflation declined to 7.9% in June from 8.7% in May, in what’s probably a huge relief for Threadneedle St [the Bank of England].
Core inflation was also down.
It doesn’t really matter too much what the finer details are and what the actual number is as far as markets are concerned, it’s all about the direction; and it’s going the right way.
Gilt yields fell sharply with the 2yr back to a one-month low at 4.833%, dropping ~25bps on the session for its biggest drop since March, having traded near 5.50% two weeks ago. It cements the market’s disinflation narrative.
Longer-dated UK government bonds are also rallying, reflecting renewed hopes that inflation will fall faster than feared, meaning interest rates will peak below 6%.
....10 year yields down 14 basis points... pic.twitter.com/gFUI9c3pxr
— Ben Chu (@BenChu_) July 19, 2023
However, Moneyfacts has just reported that average mortage rates have risen this morning, following two days where they remained unchanged.
They say:
The average 2-year fixed residential mortgage rate today is 6.81%. This is up from an average rate of 6.78% on the previous working day.
The average 5-year fixed residential mortgage rate today is 6.33%. This is up from an average rate of 6.30% on the previous working day.
Clearly it’s too early for mortgage lenders to have reacted to this morning’s inflation report, but borrowers will be hoping to see rates fall in the days ahead, given the moves in the bond market….
Stock market surges on inflation optimism
Shares are rallying strongly in the City, as traders cheer the larger-than-expected drop in UK inflation to 7.9% in June.
The blue-chip FTSE 100 index hit its highest level since 21 June in early trading, and is currently up 93 points or 1.2% at 7,547 points.
The FTSE 100 jumps on better-than-expected inflation data in the UK pic.twitter.com/CJTUNIliYj
— IG (@IGcom) July 19, 2023
Housebuilders are among the top risers, reflecting hopes that interest rates will not be raised to 6% or higher as feared.
Barratt Development, Persimmon and Taylor Wimpey have all jumped around 5%, helped by the falling expectations for UK interest rate rises.
A whole repricing of UK interest rate expectations takes place as short-end Gilts rally following soft UK CPI figures. Markets now pricing +0.28% increase on Aug 3rd vs +0.44% yesterday. Terminal rate now seen reaching 5.8% compared to an expectation of nearer to 6.25% yesterday.
— Saxo UK (@SaxoUK) July 19, 2023
Victoria Scholar, head of investment at interactive investor says:
“European equities have opened in the green and the FTSE 100 back above 7,500 with UK inflation figures in focus.
Housebuilders are at the top of the UK index, hitting a one-month high, thanks to a softer-than-expected CPI reading.
The FTSE 250 index, which contains smaller companies and is more UK-focused, has surged by around 2.5% this morning with nearly every stock rallying.
Traders will be hoping that the Bank of England does not need to hike borrowing costs as fast as feared, meaning less damage to the UK economy.
Updated
Inflation figures today will give many on a tracker mortgage hope their bet will pay off sooner than previously predicted pic.twitter.com/62aiRDwdxF
— Emma Fildes (@emmafildes) July 19, 2023
June’s drop in inflation will “fuel a narrative that we are through the worst” of the cost of living squeeze, says Kitty Ussher, chief economist at the Institute of Directors:
“However, core inflation has only eased slightly. The Bank of England will also be concerned that inflation in the services sector is proving relatively persistent….
The Bank of England will hope that this will cause business leaders and others to lower their expectations of future inflation, which could then become self-fulfilling.”
Despite June’s drop to 7.9%, the UK still has a much worse inflation problem than other advanced countries.
In the US, for example, inflation fell to 3% in June, while in the eurozone it is estimated to be 5.5% (we get updated data at 10am BST).
This gap has been blamed on the UK suffering from both Europe’s surge in energy costs, and also labour shortages similar to the one which hit the US.
International comparison… UK highest/ stickiest
— Faisal Islam (@faisalislam) July 19, 2023
Fall from peak:
US - -7.4% over 11 months
Germany - -4.8% over 8 months
UK - -3.2% over 8 months
France - -2% over 4 months pic.twitter.com/2aJ9Vzw2ZV
Shapps: It's good to see inflation coming down
Grant Shapps, the Secretary of State for the Department for Energy Security and Net Zero, has welcomed the drop in UK inflation to 7.9% this morning.
He told BBC Radio 4’s Today programme that inflation was effectively a tax on households and businesses:
“I think we have to stay the course and I welcome the drop this morning, 7.9%.
But of course, that’s still prices 7.9% higher than they were a year ago. This is a very important, significant, effectively tax on households and businesses in this country.
And we want to see it continue to fall. So we’re going to carry on following the plan, which is now working, we’ve come down from 11.1% I think at its peak, and make sure that we support the process, support the bank in the work that they’ve been doing. But also things like the energy price guarantee over the winter were big supports. We’re now seeing energy prices fall and that’s leading to lower inflation as well.”
Shapps added that nine other EU countries had higher inflation rates than the UK.
He also poined to the tight UK labour market as one factor pushing up inflation:
“I think our uniqueness in Europe has been, one of the key aspects has been, we’ve got both the threat that Putin posed from using energy as blackmail, but also incredibly low, tight employment market in the UK, where unemployment is so low, and in fact, we have record numbers of people in work.
So I think that’s made our inflation stickier, but very good to see it come down today.”
ING: Finally, good news on UK inflation
Finally, we have some good news on UK inflation. says James Smith, developed markets economist at ING.
Smith writes:
Headline CPI has dropped back to 7.9%, below consensus and almost a full percentage point lower than in May.
Much of that can be put down to petrol and diesel prices, which fell by 2.6% across the month – a stark difference to the same period last year, where we saw a near-10% spike amid the ongoing fallout of the Ukraine war.
But encouragingly, we also saw a marked slowdown in food inflation.
These prices increased by 0.4% on the month, which looks like the slowest month-on-month increase since early 2022. This is a trend that should continue, given that producer prices for food products are now falling on a three-month annualised (and seasonally-adjusted) basis.
Smith says the August Bank of England meeting is “going to be a close call”, but today’s data makes a 25bp hike (a quarter of one percentage point) more likely than a repeat 50bp increase.
He explains:
The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply.
The risk is that the BoE applies a similar logic to that seen in June. This could mean that if it expects to hike again in September, then it might as well opt for a larger 50bp hike in August. We certainly wouldn’t rule this out.
In further good news on inflation, UK producers have slowed their price rises.
The ONS reports that prices at the factory gate only rose by 0.1% in the year to June, down from 2.7% in the year to May.
Producers benefited from cheaper raw materials – their input prices fell by 2.7% in the year to June 2023, led by cheaper crude oil and petroleum products.
On a monthly basis, producer input prices fell by 1.3% and output prices by 0.3% in June.
In more encouraging inflation news, input producer price inflation has now turned negative after peaking over 24% last June. Suggests consumer price rises could continue to fall rapidly in the coming months via @ons pic.twitter.com/gJOMkImFcl
— Mehreen Khan (@MehreenKhn) July 19, 2023
Hopefully retailers will pass this onto consumers, otherwise accusations of ‘greedflation’ and profiteering will grow louder.
Here’s a breakdown of how prices changed in June, year-on-year, pulling inflation down to 7.9%.
Food and non-alcoholic beverages: prices rose by 17.3% in the year to June, down from 18.3% in the year to May
Alcoholic beverages and tobacco: prices rose by 9.2% per year, down from 9.3% in May
Clothing and footwear: prices rose by 7.2%, up from 7.1% in May
Housing, water, electricity, gas and other fuels: prices rose by 12%, down from 12.1% in May
Furniture, household equipment and maintenance: prices rose by 6.5%, down from 7.5% in May
Health: Prices rose by 8.2%, down from 8.3% in May
Transport: prices fell by 1.8%, down from a 1.2% rise in May
Communication: Prices rose by 9.5%, up from 9.1% in May
Recreation and culture: Prices rose by 6.7%, matching May’s reading
Education: Prices rose by 3.2%, matching May’s reading
Restaurants and hotels: Prices rose by 9.5%, down from 10.3% in May
Miscellaneous goods and services: prices rose by 6.5%, down from 6.8% in May
Updated
On a monthly basis, consumer prices rose by 0.1% in June.
That’s a slowdown on May, when prices rose by 0.7% month-on month.
Consumer prices have been rising on a monthly basis since February this year, as this table shows, which has kept the annual rate of inflation (prices compared to a year ago) high:
Updated
UK interest rates expected to rise less sharply
In the City, investors are rethinking how high the Bank of England will need to raise interest rates, now that inflation has dropped by more than expected to a 15-month low of 7.9% in June.
The money markets now think there is a 65% chance that the Bank only raises rates by a quarter-point, from 5% to 5.25%, at its meeting in early August.
A larger, half-point, hike next month is seen as a 35% chance.
Last night, the odds were the other way around – with a half-point rise seen as a 58% chance (as flagged earlier).
Looking further ahead, UK interest rates are now seen peaking at around 5.8% in February 2024, down from around 6% yesterday.
Earlier this month, the markets had priced in rates rising as high as 6.5% by March.
Mohamed El-Erian, chief economic advisor to Allianz, says this is good news for mortgage holders.
The immediate reaction of the #markets to the better-than-expected #UK #Inflation includes a weaker #currency as markets are inclined to reprice lower the path of interest rates.
— Mohamed A. El-Erian (@elerianm) July 19, 2023
This is good news for those looking for mortgages and have faced higher costs and occasional… pic.twitter.com/SLzUXILzRP
Paul Dales, chief economist at Capital Economics, says:
Overall, the UK will probably still have higher rates of inflation than elsewhere for a while yet, but at least the UK is now following the global trend. Our forecast is that core and services CPI inflation will both ease gradually as the effects of the previous rises in interest rates are felt.
But with wage growth and services CPI inflation both currently stronger than the Bank had expected back in May, we think there is enough evidence of “more persistent pressures” to prompt the Bank to raise interest rates a little bit further than we previously thought.
Even so, we think rates are more likely to peak between 5% and 6% than between 6% and 7%.
Updated
Rachel Reeves: prices are still going up at staggering rates
Shadow chancellor Rachel Reeves points out that an inflation rate of 7.9% still means prices are rising at ‘staggering rates’.
That’s an important point – falling inflation does not mean prices are falling (just that they are rising less rapidly).
Reeves says:
“Inflation has been persistently high and remains higher than our international peers. This is becoming a hallmark of Tory economic failure.
“Today’s numbers confirm what families across the country already know – that prices are still going up at staggering rates and that they’re bearing the brunt of those costs.
“There may be global shocks – but Britain is so exposed to those because of Tory economic failure that has led to a severe lack of security in our economy.
“Only Labour has the plans Britain needs to put our economy on a more secure path – so that families are better off and so we can grab hold of the opportunities of the future.”
Jeremy Hunt has said the government was not complacent about inflation, after it dropped to a 15-month low of 7.9% in June.
The chancellor says:
“Inflation is falling and stands at its lowest level since last March; but we aren’t complacent.”
Cheaper petrol and diesel at the pumps helped to pull inflation down last month.
Today’s inflation report shows that motor fuel prices fell by 22.7% in the year to June 2023, compared with a fall of 13.1% in May.
The ONS explains:
Average petrol and diesel prices stood at 143.0 and 145.7p per litre respectively in June 2023, compared with 184.0p and 192.4p per litre in June 2022.
Petrol prices fell by 1.4p per litre between May and June 2023, compared with a rise of 18.1p per litre between the same two months a year ago
Similarly, diesel prices fell by 8.9p per litre this year, compared with a rise of 12.7p per litre a year ago.
Updated
Pound falls after inflation report
Sterling has dropped sharply in the foreign exchange markets, as investors react to the drop in UK inflation in June to 7.9%.
The pound has lost almost a cent against the US dollar to $1.2940, down from $1.3034 last night.
That suggests the City are expecting that fewer increases in interest rates may be needed to cool UK inflation….
Pound down vs US dollar as traders react to the lower-than-expected inflation. Will be interesting to see what this does to interest rate expectations too. Full inflation release from @ONS here: https://t.co/J8rFd9LLQi pic.twitter.com/ceUl5llgFj
— Ed Conway (@EdConwaySky) July 19, 2023
Updated
Core UK inflation drops to 6.9%
Importantly, underlying inflation has dropped in June too.
Core CPI, which excludes energy, food, alcohol and tobacco, rose by 6.9% in the 12 months to June 2023, down from 7.1% in May (which was a 30-year high).
Economists had expected core inflation would stick at 7.1%, so this could encourage the Bank of England that inflationary pressures are a little less sticky than feared.
But, the Bank’s target is to bring headline CPI inflation down to 2%, so policymakers could still press on with interest rate rises in the month ahead…
🇬🇧 UK June inflation rate lower than expected at 7.9%
— PiQ (@PriapusIQ) July 19, 2023
Core inflation - a measure which excludes food, energy, alcohol and tobacco prices and which the BoE watches closely to gauge underlying price pressures - also dropped by more than expected, coming in at 6.9% from May's 7.1%,… pic.twitter.com/Oabspav74V
Updated
UK inflation: the key chart
Here’s a chart showing how UK inflation has fallen to its lowest level since March 2022 (when it was 7%) last month, away from the peak of 11.1% hit in October last year.
ONS: Food price inflation eased slightly
Falling prices for motor fuel helped to push the UK inflation rate down in June, the ONS says.
Food prices rose in June 2023 but by less than in June 2022, also leading to an easing in inflation.
Office for National Statistics (ONS) chief economist Grant Fitzner says:
“Inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels. Meanwhile, core inflation also fell back after hitting a 30-year high in May.
“Food price inflation eased slightly this month, although it remains at very high levels.
“Although costs facing manufacturers remain elevated, especially for construction materials and food items, the pace of growth has fallen across the last year, with the overall cost of raw materials falling for the first time since late 2020.”
@GrantFitzner continued: (2/3) 💬 pic.twitter.com/IigwlIP91w
— Office for National Statistics (ONS) (@ONS) July 19, 2023
Updated
This is the first time in several months that UK inflation has come in below expectations, points out Sky New’s Ed Conway.
🚨NEW🚨
— Ed Conway (@EdConwaySky) July 19, 2023
UK annual CPI inflation rate DROPS from 8.7% in May to 7.9% in June. Economists had expected 8.2%.
Will be a BIG relief for policymakers. First time it's been below expectations for ages.
Core CPI inflation also falls to 6.9%. Was 7.1% in May.
UK inflation falls faster than expected in June
Newsflash: UK inflation has fallen to a 15-month low, but still remains at painfully high levels.
The consumer price index rose by 7.9% in the year to June, new figures from the Office for National Statistics show, down from 8.7% in May.
That’s the lowest reading since March 2022.
Annual inflation slowed in June 2023.
— Office for National Statistics (ONS) (@ONS) July 19, 2023
▪️ Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.3% in the 12 months to June 2023, down from 7.9% in May
▪️ Consumer Prices Index (CPI) rose by 7.9%, down from 8.7% in May
➡️ https://t.co/cPUYOHcBiw pic.twitter.com/hDD1Q2AiJb
It’s a larger fall than expected, with City economists having predicted a fall to 8.2%, which will cheer policymakers at the Bank of England.
Updated
The British pound is holding just ahead of 1.30 ahead of UK inflation data which is to be released later this morning. #GBPUSD
— SCOFIELD! (@Scofield_Fx) July 19, 2023
High inflation has been eating into UK workers’ wages for months, with pay rises failing to keep pace with rising prices
Nela Richardson, chief economist at payroll operator ADP, says rapidly rising prices have had “a downbeat effect” on worker sentiment about their pay.
Richardson explains:
One in 2 UK workers reported that they were underpaid for their job compared to 1 in 4 globally, according to ADP’s global study of more than 32,000 workers in 17 countries.
And while globally workers expected their pay to rise by 8.3% on average in 2023, UK workers expect wages to grow by just 5.6% this year.
Updated
RBC Capital Markets’ economists expect UK CPI inflation to have fallen to 8.2% y/y in June from 8.7% in May.
But, a large part of that fall is, however, expected to have come from non-core items, including motor fuel and food, rather than the ‘core inflation’ which the Bank of England watches closely.
This morning’s inflation numbers will be critical to the Bank of England’s next decision on UK interest rates, due in early August.
Michael Saunders, senior adviser at Oxford Economics and a former BOE rate-setter, told Bloomberg that anything above 8.2% “would be deeply alarming” and anything below “would be somewhat reassuring.”
Currently, a half-point increased in interest rates, from 5% to 5.5%, is seen as more likely (a 58% chance, according to the money markets) than a smaller, quarter-point rise to 5.25% (a 42% chance).
Markets are pricing in that Bank rate will peak at 6.0% at the end of the year, lower than the 6.5% peak in early 2024 they had recently forecast.
An index of London-listed homebuilders rose as much as 4% having fallen 12.15% in the 2nd 1/4 on top of a 44.4% slump in 2022. Traders now see BoE interest rates peaking at around 6.00% in Dec & not the 6.5% predicted earlier this mth. All👀 on CPI in morn https://t.co/u0dsHf3vxR
— Emma Fildes (@emmafildes) July 18, 2023
Introduction: All eyes on June's UK inflation report
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Tension is high in the City, and in Westminster, this morning as we await the latest UK inflation report, due at 7am.
June’s CPI report is expected to show that price rises slowed last month. Economists predict that the annual inflation forecast will dip to 8.2% from 8.7% in both April and May.
That would be the lowest reading in 15 months, since March 2022.
City economists predict that food and fuel provide the drag on inflation last month, as we catch up with the sharp price rises in summer 2022.
Yesterday, data from Kantar showed that grocery price growth cooled to 14.9% per year in over the four weeks to 9 July.
But while a fall in inflation would be welcome, prices have been rising much faster than the Bank of England’s 2% inflation target for around two years.
Traders will also be watching for the latest core inflation reading, which is expected to remain at a 31-year high of 7.1%. That would maintain the pressure on the Bank of England to keep raising interest rates this year.
British households and businesses are bracing for UK inflation figures on Wednesday that are expected to keep the pressure on the Bank of England to raise interest rates again https://t.co/176c5GYp2u pic.twitter.com/jRk6MwcJHN
— Bloomberg UK (@BloombergUK) July 18, 2023
On Monday, prime minister Rishi Sunak acknowledged that inflation is not coming down as quickly as he would like (as his target to halve it by the end of the year, to around 5%, looks more challenging).
Sunak told LBC:
“Inflation is prices going up, and they are all going up faster than we would like.
“That’s what is eating into people’s pay packets, it’s what’s eroding their savings, it’s what’s putting up interest rates and putting pressure on mortgages.
“So, the best way to help people with the cost of living … is to bring down inflation.
We’re about to find out how much progress has been made….
Also coming up today
Jaguar Land Rover-owner Tata is expected to announce it will build its flagship electric car battery factory in the UK, in a major boost for the British car industry.
The new plant in Somerset is likely to be officially announced on Wednesday, backed with £500m in government funding,
The agenda
7am BST: UK inflation report for June
9.30am BST: UK house price index for May
10am BST: Final estimate of eurozone inflation in June
1.30pm BST: US building permits for June
2.15pm BST: Treasury Committee to question Financial Conduct Authority on topics including mortgages and savings
4pm BST: Business and Trade committee hearing on the road fuel market with the CMA and Mohsin Issa CBE, co-owner of Asda.
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