UK inflation: what to expect from July data

This rise in the inflation rate has been predicted by officials this year as favorable comparisons to energy prices in 2023 fade from monthly numbers.

The core CPI, which excludes the more volatile energy and food prices, will receive as much attention as the headline CPI figure. This measure was forecast to fall to 3.4% in June, but remained at 3.5%, the same as in May. In July, core CPI is expected to fall to 3.3%. Services inflation is also a concern for the BoE, having stood at 5.7% last month, and policymakers will be keen to see that figure fall as well.

August interest rate cut

Since the last inflation printout, the Bank of England has cut interest rates from 5.25% to 5%, a move expected by financial markets. It also released its latest economic forecasts at the August 1 meeting. In these, the Bank forecasts an increase in CPI inflation from the current level of 2% to around 2.75%. This is expected to decline in 2025 and 2026 as the “tight stance” of monetary policy – ​​meaning expensive money – continues to have an impact. A warm economy and a “slack” labor market will mean weaker wage regulations. These scenarios may change, says the Bank. And that means caution will persist in rate setting. Financial markets are pricing in the next rate cut in November, but one sentence in the latest report suggests the Bank has yet to declare victory against inflation, which has fallen from more than 11% in two years:

“Monetary policy will need to remain tight for long enough until the risks to a sustainable return of inflation to the 2% target over the medium term dissipate further.”

Across the Bank’s inflation forecasts for 2025, CPI remains above the 2% one-year target, before falling below target in 2026.

Bank members look at a wide range of data before making decisions on monetary policy, with unemployment and wage growth in the mix. Both sets of data are released the day before the inflation figures, on August 13. The unemployment rate is expected to have held steady at 4.4% in the three months to June, while average weekly earnings are expected to have risen 5.4% in June. down from 5.6% in the previous month.

What drove inflation this summer?

What else happened in the UK economy in July that could have boosted demand for certain goods and services? Although there was no “Taylor Swift effect” in July, the month featured the European football championship, the start of the Olympics in Paris and heat waves that would have boosted sales of seasonal products.

The August data, due in mid-September, could include social unrest sweeping the country, which is already affecting retail traffic, according to early estimates. On a brighter note, Taylor Swift’s second leg of her UK tour kicks off again in August.

Currency fluctuations could be another factor in August’s inflation numbers. Sterling had a good run in the run-up to the July election, rising from €1.15 in early 2024 to €1.19 and $1.27 to $1.30 before falling sharply in early August. A stronger currency tends to make imports cheaper and exports more expensive – and vice versa.

Another factor that will affect inflation in the coming years is the change of government: Labor took control on July 5 after 14 years of Conservative government. With a massive majority, the new Starmer administration has a substantial mandate to implement a number of new fiscal measures. New Chancellor Rachel Reeves has already floated the idea of ​​future tax rises, which would mean less money for consumers to spend. Conventional economic policy suggests that this will act as a brake on demand and lead to lower inflation.