United Kingdom: Softer CPI supports prolonged BoE hold – TD Securities

TD Securities’ Julie Ioffe expects United Kingdom (UK) headline Consumer Price Index (CPI) to slow to 2.7% year-on-year in June, in line with consensus but below Bank of England (BoE) projections, as lower fuel prices offset sticky Services. Core CPI is seen at 2.6% and Services at 3.6%. TD highlights the inflationary pass-through from Ofgem’s July price cap increase and potential second-round wage effects as key risks for UK inflation and Bank of England policy.

Fuel-driven reprieve but services sticky

"We expect headline inflation at 2.7% y/y in June (mkt: 2.7%, BoE: 3.1%, prior: 2.8%), easing slightly from May levels as fuel prices deliver some reprieve from the levels seen in the spring. We see services inflation remaining sticky, only coming down slightly to 3.6% y/y (mkt: 3.5%; BoE: 3.6%; prior: 3.7%), due to inflationary pressures from airfares. With core goods not delivering much of a story this month, this would keep the core inflation measure at 2.6% y/y (mkt: 2.6%)."

"There will be no Ofgem adjustments to electricity and gas prices in June, making fuel the only pertinent story. There, fuel prices are likely to drop more on a m/m basis after a slight easing in April, though we expect the y/y measure to remain elevated at 21.3% y/y. Including annual electricity and gas contributions, energy inflation as a whole is likely to increase to 5.9% y/y, with further pass-through expected over the coming months."

"A key factor is the index date on which ONS collects prices. For June, the two possible dates that meet the ONS criteria are June 9th and 16th, and our forecasts use data collected on the latter. A change in collection date creates a fair downside risk on airfare prices, which would bring services to 3.5% y/y and core down with it to 2.5% y/y, to match current market consensus."

"Beyond that, concerns shift to whether wages respond to higher inflation. There, we see less of an obvious impact given the loosening of the labour market and reduced bargaining power of the worker. Should these remain at bay, the BoE is more likely to remain on a prolonged hold at its already-restrictive level of Bank Rate, rather than elect for an imminent hike."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)