UK Inflation Rises to 2.9% in July as Core CPI Holds at 2.6%

The UK consumer price index (CPI) increased, with a 2.9% gain year-over year in July. This was sharply higher than the 2.6% gain in June but matched the market estimate. The rise in July inflation was driven by higher gas and electricity prices, although motor fuel and food prices eased. On a month-over-month basis, CPI rose 0.3%, up from 0.1% in June and matching the market estimate.

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Core Inflation Holds at 2.6% for a Third Straight Month

Core CPI, which excludes food and energy and is a better gauge of long-term inflation, remained steady at 2.6% for a third consecutive month, just above the market estimate of 2.5%. On a monthly basis, the core rate dipped slightly to 0.2%, down from the June reading of 0.3% but above the market estimate of 0.1%.

BoE Faces Inflation and Labour Market Policy Dilemma

The rise in inflation will be a major disappointment for the Bank of England (BoE). Inflation remains stubbornly high and has been above than the BoE’s 2% target for around five years. There is a lot of uncertainty around the energy price outlook, with an upward risk to the energy prices due to the continuing conflict in the Persian Gulf. As higher energy prices means higher inflation, the BoE is under pressure to hike rates, which are already high, if there is a renewal of fighting between Iran and the U.S.

At the same time, this week’s labor market data pointed to a slowdown in the job market, job vacancies hit a five-year low and wage growth slowed. This could deter the BoE from raising rates, which would weigh on economic growth.

The BoE maintained interest rates at the July meeting, but the Monetary Policy Committee vote was a 6-3 split, with three members voting to raise rates by a quarter-point. Today’s inflation report could make additional members more inclined to vote for a rate hike at the September 17 meeting. Market expectations for a rate hike before the end of the year currently stand around 30%, but those odds could quickly jump sharply if there is a spike in energy prices.

GBP/USD and FTSE 100 Show Muted Reaction to CPI Data

In the Forex market, the British Pound showed a muted response to the UK inflation report. The GBP/USD currency pair is up by 0.14% in today’s European session, trading at 1.3550.

The UK stock market has just opened. The FTSE 100 Index, which is the benchmark index for the UK stock markets, is showing little movement, with the index up 7.82 points (0.07%) at 10,735.86.