Remarkably benign UK food prices keep a lid on inflation
The UK inflation narrative is currently shaped by unexpectedly stable food prices, which are counteracting increases in energy and rent costs. Per the full note from ING, inflation has risen to 2.9% in July but is anticipated to peak at just 3.2% this winter—well within the comfort zone for the Bank of England (BoE) to maintain current interest rates. This benign food price environment suggests the BoE's hawkish members may find a reason to pause in their calls for rate hikes, stabilizing sentiment ahead of anticipated rate cuts in spring 2024. Overall, the absence of impending high-impact events in the next 30 days allows the market to digest these developments without immediate volatility drivers.
What the desk is arguing
The current UK inflation data indicates that the Bank of England is unlikely to accelerate interest rate hikes despite a recent uptick in inflation figures. According to the ING report, the flat food prices in July are a crucial factor maintaining inflationary pressure at low levels. This suggests a calibrated approach from the BoE, reassuring that they have room to navigate economic conditions without aggressive rate adjustments.
Supporting this view, the report notes that headline inflation has risen due to higher household energy bills and rents, but these increases are offset by static food prices which might even lead to negative inflation readings for some categories. Such dynamics suggest stability in consumer expectations regarding inflation moving into the next winter period.
Where it sits in our coverage
Our consensus target for GBP/USD is set at 1.075, with a range of 1.04 to 1.12 across the major firms. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This assessment aligns with the growing consensus that the BoE will keep rates stable in the short term, with bofa slightly diverging by suggesting a lower rate environment could be nearing.
How other firms see it
Firms aligned with this cautious stance on rate hikes include jpmorgan, which supports the idea of holding and potentially lowering rates in early 2024, while bofa contrasts this view, projecting tighter conditions by advocating a more aggressive rate cut scenario.
Key indicators to monitor include UK consumer price index movements and the underlying services inflation trends, which affect broader market sentiment towards the BoE's monetary policy adjustments. Additionally, GBP/USD should be watched closely as it reflects direct market reactions to these economic signals.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK inflation rises to 2.9%, projected to peak at 3.2% this winter.
- 02Benign food prices ease pressure on the Bank of England for immediate rate hikes.
- 03Consensus remains that current rates are likely to hold before potential cuts next spring.
Market implications
Traders should watch for a stability in GBP/USD around 1.075, as the recent inflation readings provide mixed signals. The lack of imminent calendar events allows for the current narrative to shape sentiment without interruptions, but any surprises in services inflation or energy prices could provoke market fluctuations.
Risks to this view
Should food prices begin to show significant upward momentum or if services inflation accelerates unexpectedly, the Bank of England may be forced to reconsider its dovish stance, thus potentially leading to a shift in interest rate outlooks that could impact GBP valuations.
Older quick take Quick take Published 07:42 United Kingdom Remarkably benign UK food prices keep a lid on inflation UK inflation picked up in July and is likely to peak around 3.2% next winter. We think that's well below the threshold for a rate hike – and we expect the Bank of England to keep rates on hold this year before resuming rate cuts next spring Surprisingly benign food inflation should prove welcome news for the Bank of England’s hawks Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK The bar for a Bank of England rate hike remains high. That’s the main message from today’s UK inflation figures.
Headline inflation is up three-tenths of a percentage point to 2.9%, on the well-telegraphed rise in household energy bills and also a bigger rise in social rents than this time last year. That was offset by July’s short-lived dip in petrol and diesel prices (spoiler alert: that won’t last into August’s figures). None of that was unexpected.
What remains much more surprising, however, is just how benign food inflation is right now. Prices here were flat on the month, having fallen in month-on-month terms in the two prior readings, something that is highly unusual. A quick glance at producer prices suggests consumer food inflation could theoretically even go negative in annual terms over the next few months.
We’re not convinced that will happen – and it was always going to take at least a year for the full effects of the Iran War to show up here. But it should still be welcome news for the Bank of England’s hawks, who point to the influential role of food prices in setting household inflation expectations. Producer prices point to negative food inflation Source: Macrobond, ING "> Source: Macrobond, ING The news was fractionally less welcome on services inflation, which is ultimately what the Bank cares most about.
Overall services CPI dipped to 3.4%, though mainly because of a low air fares reading. Strip that and other volatile/indexed categories out, and our calculation of the BoE’s preferred core services metric actually picked up a touch. Still, the overall message here is that there’s scant evidence so far – beyond energy prices – that the war in Iran is having a tangible impact on inflation.
It is very early days, admittedly. But we calculate UK inflation for products that have “very high” or “high” energy intensity – and so far neither has shown any sign of picking up. Groupings with lower energy exposure have continued to see inflation dip.
UK inflation by energy intensity Based on ONS categorisation of energy intensity Source: Macrobond, ING "> Based on ONS categorisation of energy intensity Source: Macrobond, ING We currently expect headline inflation to peak around 3.2% into next winter, on the assumption that food inflation does start to pick up a bit. But that’s well below the 4% level, which we think is the threshold for the Bank to seriously consider rate hikes. We continue to see the Bank of England keeping rates on hold this year, before resuming rate cuts next spring.
United Kingdom Inflation Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Older quick take
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