The mirage of slowing UK inflation

The UK consumer price index was unchanged for July, and the year-over-year growth rate returned to 2.0% after 2.5% in June and 2.1% in May. But the Bank of England is unlikely to enjoy its inflation target for long as this was due to one-off factors.

Other inflation indicators are pointing to further pressure. The retail price index added 0.5% m/m and 3.8% y/y, reflecting the continued growth in shops. This momentum is fuelled by a new batch of producer price increases.

Output Producer Prices accelerated to 4.9% y/y, while Input PPI rose to 9.9%. The latter figure has remained close to 10% y/y for four months, and manufacturers will be forced to pass on the increased costs to consumers.

Consequently, Britain’s continued elevated inflation risks may force the Bank of England to act earlier than expected. Overall, inflation reports exceeded expectations and reflect an acceleration in price growth that might rehabilitate the pound, which turned lower against the euro last week and fell under the 200-day average – an important trendline below which GBPUSD has not traded consistently since July last year.

The FxPro Analyst Team