UK inflation increased again in June, piling further pressure on UK households and businesses at a time when the labour market is slowing and interest rates remain at elevated levels.
“CPI came in at 3.6% in June, up from 3.4% in May with core inflation quite a bit higher at 3.7% in June compared with 3.5% in May,” explained Rob Morgan, Chief Investment Analyst at Charles Stanley.
“Perhaps more importantly, annual services inflation stayed at 4.7% despite many forecasting it would fall back. This is a key metric to watch as it is driving the overall headline number and is highly sensitive to employment costs which have recently been on the rise.”
Economists had predicted inflation would rise 3.4% in June.
The primary concern for households, businesses, and equity bulls is that the higher inflation rate alters the trajectory of UK interest rates and hinders the Bank of England’s ability to cut interest rates in the near future.
Interest rate futures markets quickly priced in fewer rate cuts this year as the news broke on Wednesday. The pound rose against the dollar, and the FTSE 100 opened lower.
However, analysts point to upcoming jobs data that may force the BoE’s hand. The UK labour market is showing signs of slowing down, and interest rate setters will be mindful of the need to support the economy to avoid any threats to price stability in the future.
“Today’s CPI data spells more pressure for consumers thanks to the surge in food prices, but the overall picture doesn’t quite spell the end for any further rate cuts,” said Chris Beauchamp, Chief Market Analyst at IG.
“Core goods and services inflation was broadly contained, and the focus shifts now to the job numbers tomorrow to see if there are further signs of weakness that might keep the BoE on course to ease policy in upcoming meetings.”