Soft UK CPI flatters to deceive as Hormuz closure looms over July
This morning's June CPI report delivered the downside surprise on headline inflation that we flagged in our preview, with annual price growth slowing from 2.8% to 2.6%, below the 2.7% consensus and the softest reading since March 2025.
Even so, the details were less friendly than the headline suggests. Core inflation held at 2.6% against expectations for a dip to 2.5%, while services inflation, the MPC's preferred gauge of underlying price pressures, eased only marginally from 3.7% to 3.6%, a touch above consensus.
Digging into the release, June's headline inflation owes almost everything to a fall in energy inflation, which saw prices rise 5.7% YoY, much slower than the 7.4% seen the month prior and below the 8.3% rate of increase pencilled in by the BoE.
But this was largely a function of timing. June's prices were collected on or around the 16th, during the short-lived US-Iran ceasefire, a window in which the Strait of Hormuz reopened, and oil had fallen around 15% from its early-June peak. That truce collapsed on July 8th, and Brent now trades back around $90 per barrel. Layering on Ofgem's July price cap increase, headline inflation is likely to snap back next month, albeit blunted to some extent by a temporary VAT cut for hospitality services through July and August.
For the BoE, however, we doubt this print hands the hawks a majority next Thursday.
Having held Bank Rate at 3.75% in June on a 7-2 vote, with Megan Greene and Huw Pill preferring a hike to 4.0%, the Committee can point to Q2 inflation averaging 2.7%, undershooting the near-term path set out in the Bank's spring projections, despite the war.
Combined with yesterday's labour market report, which showed wage growth tracking at 3.4% 3m/YoY, evidence of second-round effects remains thin on the ground. That should keep the majority comfortable looking through an energy-led bump, even as sticky services inflation warrants vigilance. We expect another hold on July 30th, accompanied by fresh forecasts showing a bumpier near-term inflation path.
Markets appear to have read it much the same way.
Sterling dipped briefly on the headline miss before steadying, with the firmer core details limiting any dovish repricing, leaving cable trading around the 1.34 handle and swaps still favouring an extended hold next week while fully pricing a rate hike by November.
With the rates channel offering little fresh impetus, we think the pound's near-term direction remains hostage to fiscal headlines, with traders awaiting detail on Prime Minister Burnham's spending priorities after recent "flexibility" comments rattled gilts, notwithstanding Chancellor Healey's better-received appointment. Against that backdrop, and with Middle East risks still skewed towards escalation, we retain a modest downside bias on sterling.