UK Inflation Inflation Rate Softens from 7.9% to 6.8% in July

Highlights

• The UK annual inflation rate drops to 6.8% in July.
• Food and beverages also had a downward effect on CPIH.
• However, the inflation remains elevated, leaving the threat of aggressive BoE policy maneuvers on the table.

It was another busy morning on the UK economic calendar. The UK inflation report was in the spotlight. After the hotter-than-expected wage growth figures and UK GDP numbers, the CPI Report could have the final say on BoE monetary policy expectations.

The UK annual inflation rate softened from 7.9% to 6.8% in July. Consumer prices declined by 0.4% from June to July versus 0.1% in June. Economists forecast consumer prices to fall by 0.5% month-on-month and for an annual inflation rate of 6.8%. The UK annual inflation rate softened from 8.7% to 7.9% in June.

According to the Office for National Statistics,

• The consumer price index, including owner occupiers’ housing costs (CPIH), increased 6.4% in July year-over-year versus 7.3% in June.
• Falling gas and electricity prices (Household and household services) were the largest downward contributors to the softer annual inflation rate, rising by 5.4% year-over-year compared with a 7.3% decline in June.
• Importantly, food and non-alcoholic beverages also had a downward effect, with the CPIH monthly rate softening from 17.4% to 14.9%.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) rose 6.4% year-over-year, at the same rate as the June rate.

Today’s CPI Report should support less hawkish bets on peak interest rates but leave the BoE on track for further rate hikes, with inflation remaining elevated.

GBP to USD Reaction to UK Inflation Report

Ahead of the UK Inflation Report, the GBP to USD fell to an early low of $1.26871 before rising to a pre-stat high of $1.27123.

However, in response to the UK inflation report, the GBP to USD jumped to a high of $1.27319 before falling to a post-stat low of $1.27084.

This morning, the GBP to USD was up 0.02% to $1.27070.

Up Next

While the UK economic calendar was busy, no Bank of England Monetary Policy Committee Members are on the calendar to speak today, leaving chatter with the media to influence.

US housing sector data and industrial production figures for July will be in focus. While the housing sector is a litmus test for the US economy, industrial production numbers will garner interest.

Investors are looking for signs of a deviation from the soft-landing theory.

However, it is worth noting that the industrial production numbers are unlikely to influence the Fed. The manufacturing sector accounts for less than 30% of the US economy and is unlikely to dictate sentiment toward Fed monetary policy. In contrast, a marked deterioration in US housing sector conditions would raise eyebrows.

Later in the session, the FOMC meeting minutes will impact the GBP/USD. While the Fed raised rates by 25 basis points in July, Fed Chair Powell left the door ajar to further rate hikes. With recent economic indicators supporting further tightening, the minutes will reveal whether the Hawks or the Doves are in the driving seat.

Hawkish minutes will retest buyer appetite for the GBP/USD as economic indicators signal a hotter US economy.