UK CPI growth remains unchanged in August

UK CPI rose by 2.2% YoY in August, matching market expectations and unchanged from July, but tracking 0.2% below the rate projected in Bank of England staff forecasts.

Underlying inflation measures similarly landed in line with consensus expectations too. All told then, today’s data offers little steer for markets ahead of tomorrow’s Bank Rate decision, where markets currently see a one-in-four chance that the MPC trims rates by a further 25bps. That pricing looks about fair to us given the lack of commentary favouring a rate cut tomorrow from the core of the MPC.

While a rate cut is not off the table, we are inclined to think that policymakers are most likely to keep rates unchanged.

Perhaps the most surprising feature of the August inflation report was just how few standout price changes there were. Indeed, while core inflation rebounded from 3.3% YoY to 3.6% last month, this was largely as expected. So too was a rise in service price inflation, from 5.2% YoY in July to 5.6% last month, though this was again below the 5.8% expected by Bank staff. Unsurprisingly then, the largest contributions to annual headline CPI growth came from recreation and culture, restaurants and hotels, and other goods and services divisions, adding 0.52pp, 0.62pp, and 0.66pp respectively.

That said, there had been much speculation around hotel prices before today’s release – not least due to the resumption of Taylor Swift’s Eras tour with the singer playing London tour dates mid-month – some had speculated this could pose an upside risk. A prior set of concerts back in June coincided with a notable spike in accommodation costs, driving that month’s upside CPI beat. On this occasion, however, the survey date landed on the 13th, meaning it did not overlap with any tour dates. Accordingly, accommodation services prices sank -3.73% MoM, while hotel costs specifically dropped by -4.31%. Offsetting this was a sharp rise in transport services, up by 6.89% in August, almost entirely attributable to a 22.14% jump in the cost of airfares. Even so, with both components typically subject to large, idiosyncratic changes, we are disinclined to read too much into either reading.

For the BoE then, today’s data should do little to change the narrative ahead of tomorrow’s rate announcement.

While underlying price growth has rebounded, this was fully expected by the MPC, with CPI readings tracking modestly below Bank staff forecasts in any case. This has largely been the view of markets this morning as well. BoE rate cut odds have remained steady at around 25%, while sterling has seen only the barest nudge higher post-release. Barring a surprise from the Fed later today then, where we expect a 25bp cut in rates, a hold tomorrow from the BoE continues to look like the most likely outcome for Bank Rate.

Author: 

Nick Rees, Senior FX Market Analyst

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