News & Analysis

June’s CPI data saw headline inflation rise from 9.1% YoY to a new multi-decade high of 9.4%, a print that marginally exceeded expectations.

Not only did the annual figure increase to new highs, but the pace of sequential headline inflation also picked up. Month-on-month inflation rose from 0.7% in May to 0.8%, a pace substantially above pre-pandemic levels. Driving the increase in headline inflation were rising transportation costs (+0.16% contribution to the monthly increase in the YoY rate), an increase in restaurant and hotel prices (+0.12% contribution), and food and non-alcoholic beverages (+0.13% contribution). The annual increase in the cost of transport sat at 15.2%, largely due to the 42.3% YoY increase in motor fuel prices – the highest annual rate in the modelled CPI series which dates back to 1989.

Average petrol prices in June sat at 184p per litre, the highest price on record since 1990.

This marks an 18.1p monthly increase. The increase in petrol prices comes as no surprise to consumers, but the more recent pullback in oil prices suggests that fuel prices could soon start to drag on headline inflation rates. In contrast, food and non-alcoholic beverages rose from 8.5% YoY to 9.8%, the highest rate since March 2009. This is unlikely to mark the peak in food inflation.


While the headline data support the case for the Bank of England to hike rates by 50bp in August when taken in isolation, the details of the report aren’t as robust.

Firstly, core inflation (CPI excluding energy, food, alcohol & tobacco) notched its second consecutive monthly decline, moderating from 5.9% to 5.8%. Furthermore, the breadth of inflation pressures has narrowed and largely comes from food and energy components. Given higher prices in these components are being driven by external supply-side issues, the Bank of England may be hard pressed in relaying an increase in the pace of hiking. While hawks within the monetary policy committee (MPC) will point to the increase in core services CPI, which increased by 0.7% MoM to bring the year-on-year rate to 5.2%, this overstates the true underlying inflation pressures due to the second round effects of energy increases and VAT distortions. 

In combination with yesterday’s labour market data, June’s CPI report is unlikely to have resolved the ongoing debate within the MPC.

While it is likely to be closer than June’s split of 6-3 in favour of a 25bp hike, we still think the BoE will opt for caution in raising rates as the recent batch of data doesn’t suggest that the latest moderation in medium-term inflation expectations will reverse and that the labour market is churning out higher wage growth to the extent that it threatens generating more persistence in inflation. That being said, in a world where central banks are opting to front-load their hiking cycles as headline inflation rates near their peak, the BoE may opt to take out an insurance policy of a 50bp hike prior to the Ofgem price cap revision in October that will send headline inflation north of 11%.



Simon Harvey, Head of FX Analysis


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