British Pound: BoE outlook steady with CPI and jobs data – MUFG

Derek Halpenny at MUFG notes that UK July CPI came in broadly as expected, with the headline rate rising to 2.9% mainly on higher utility bills, while services inflation eased. Combined with labour data showing modest wage growth and weak employment demand, he argues the Bank of England is likely to stay divided, with future moves hinging on Middle East-driven energy prices.

UK inflation, labour and BoE risks

"The July CPI data has just been released in the UK and was widely as expected, with the annual rate accelerating from 2.6% to 2.9% largely due to the rise of utility bills reflecting the 13% increase in the OFGEM price cap due to rising energy prices."

"The good news was that services prices fell as expected from 3.6% to 3.4% which paints a favourable picture of domestically generated inflation. The headline increase of 2.9% is a little higher than the 2.8% expected from the BoE but that’s close enough to view this data as broadly neutral from a markets perspective. The BoE assumes a peak of 3.2% in Q4."

"The data followed the employment data yesterday that showed slightly stronger headline wage growth although the private sector ex-bonus earnings increase slowed from 2.9% to 2.8%. With demand for labour still weak (PAYE employment fell 13k) the data still paints a picture of easing inflationary risks coming from the UK labour market."

"Combining the jobs and inflation data, this data is unlikely to alter the dial much in terms of BoE thinking. The MPC will remain divided and the risks ahead will still be determined more by the external Middle East factor driving energy prices with domestic conditions still likely viewed as offsetting those risks."

"If there is no resolution to getting the Strait of Hormuz reopened and energy prices rise further from here and stay elevated then the BoE may well have to hike by year-end. If energy prices fall, the BoE will be able to hold off."