UK CPI Rises to 18-Month High — Rate Cut Bets Plunge

TradingKey - Inflationary pressures are heating up once again in the UK. Data released on Wednesday showed that the Consumer Prices Index (CPI) rose 3.8% year-on-year in July, up from 3.6% in June and marking the highest level since January 2024 — an 18-month high. The print also exceeded the market forecast of 3.7%. Following the release, the pound reversed earlier losses, trading around $1.3490.

The rise was driven by higher prices for airfares, hotel accommodation, and motor fuels. Notably, food inflation accelerated from 4.5% to 4.9% — the fastest pace since February 2024 — signaling that businesses are passing on billions of pounds in additional costs from tax hikes and a higher minimum wage to consumers.

More concerning, services inflation, a key gauge of underlying price pressures, climbed to 5%, surpassing the Bank of England’s forecast of 4.9%. This underscores the persistence of domestic inflation and reignites fears of a wage-price spiral. Some central bank officials have already warned that this risk is rising as workers seek pay increases to recover lost purchasing power.

The inflation rebound presents a major challenge for the newly elected Labour government. Chancellor Rachel Reeves and Prime Minister Keir Starmer campaigned on improving living standards for “working people,” but real income recovery is being undermined by sticky inflation.

Market analysts point to the October fiscal budget, which includes tax increases, as a key driver behind the persistent inflation. While aimed at stabilizing public finances, these measures are seen as simultaneously dampening business investment and labor market momentum — deepening the policy dilemma.

According to Reuters, while the tax-raise budget is viewed as beneficial for the UK economy in the long term, it poses short-term risks to business investment. Shevaun Haviland, Director General of the British Chambers of Commerce, warned that increasing employers’ National Insurance contributions will add to business costs, creating significant challenges — especially for small and medium-sized enterprises.

The data triggered an immediate repricing of expectations for the Bank of England’s policy path. Just weeks after cutting rates to 4% on August 7, traders have sharply scaled back bets on further easing. As of now, markets price in only a one-in-three chance of another cut in November, and just around a 50% probability of any additional easing by year-end. The outlook for monetary policy has clearly shifted — with inflation resilience slowing the pace of the expected rate-cutting cycle.