FX.co ★ Slower Services Inflation In UK Strengthens Case For More BoE Rate Cuts

UK consumer price inflation in July rose less than anticipated, as a slowdown in services price growth to its lowest point in over two years bolstered the case for additional interest rate cuts from the Bank of England.

According to the Office for National Statistics (ONS) report on Wednesday, the consumer price index increased by 2.2% year-on-year in July, following a 2.0% rise in June. Although this marks the first acceleration in inflation since last December, it slightly lagged behind economists' predictions of 2.3% and the Bank of England's projection of 2.4%.

Crucially, services inflation, a key indicator monitored by policymakers for signs of ongoing price pressures, eased to its lowest level since mid-2022. Services prices saw a 5.2% increase in July, down from the previous 5.7%. Concurrently, goods prices declined by 0.6%. This marked slowdown in services price inflation is likely to reassure the Bank of England that underlying inflation is diminishing, paving the way for potential rate cuts later this year, noted Ruth Gregory, an economist at Capital Economics. Earlier this month, the Bank of England had reduced its benchmark rate for the first time since March 2020. Following the rate cut, Governor Andrew Bailey emphasized the need for caution to avoid cutting interest rates too rapidly or excessively.

Month-on-month, consumer prices decreased by 0.2%, contrasting with the 0.1% rise observed in June.

Excluding volatile components such as energy, food, alcohol, and tobacco, core inflation fell more than expected to 3.3% from 3.5% in June, against forecasts of 3.4%.

An additional ONS report highlighted that factory gate inflation unexpectedly softened to 0.8% in July from 1.0% in June, contrary to expectations of a rise to 1.2%. Month-on-month, output prices remained unchanged, compared to a 0.7% decrease in June. Meanwhile, input prices recorded an annual growth of 0.4% after remaining flat in June, and month-on-month, input prices fell by 0.1%, a slower decline than the 0.4% drop in June.

In a separate communication, the ONS reported that house price inflation held steady at 2.7% in June. This marks the fourth consecutive month of annual price increases, following eight months of annual declines.