In the UK, the headline Consumer Price Index (CPI) rose to 2.2%, driven mainly by energy prices, since they fell less than the previous month. Meanwhile, household durable goods costs fell for the third month running.
Services inflation is still uncomfortably high at 5.2% and we expect this will prevent back-to-back interest rate cuts by the Bank of England (BoE. However, this figure was down from 5.7% in June and below analyst’s expectations. Services are labour intensive and annual wage growth is running at 5.4%.
Core inflation, which excludes food and energy, was 3.3% – its lowest level since September 2021.
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What’s happened to US inflation?
Over in the US, inflation fell from 3.0% to 2.9%, the first time that headline inflation was below 3% since March 2021.
Core CPI nudged lower, from 3.3% to 3.2%. The producer price inflation index increased 2.2%, down from 2.7% in June. A quarter of the July increase was due to a 2.8% rise in gasoline prices.
US stock markets weren’t really affected by these releases, which were broadly in line with expectations.
Weak employment data last week led markets to price in a 0.5% cut in interest rates from the Federal Reserve on 18 September. But expectations have since shifted back to a 0.25% cut – unless there’s any more weak data.
The global view
Elsewhere, inflation in the Eurozone fell below 3% back in October 2023. The July release of 2.6% was up from 2.5% the previous month.
Japanese inflation of 2.9% is now in line with US price rises and above the levels in Europe and the UK. This is in stark contrast to their battle with deflation for much of the last 25 years.
By contrast, the ongoing problems in the Chinese property market are weighing on consumer sentiment. This has kept China’s inflation below 1% over the last 12 months, with prices rising 0.5% year-on-year in July.
Inflation releases of 4.5% in Brazil, 3.5% in India, 2.1% in Indonesia and 5.6% in Mexico show the recovery from double-digit inflation has happened across a lot of emerging markets too. But there are exceptions, where economic imbalances are more severe, notably Argentina (272% in June) and Turkey (62% in July).
What does this mean for global interest rates?
The supply shocks of the pandemic are now a distant memory. Goods price inflation is in negative territory in the UK. However, wage inflation is stickier, rising and falling at a slower rate than consumer and producer prices.
Interest rate changes are typically about a year delayed and we expect improvement in almost all measures of inflation over the last year to continue.
Base effects mean we’re likely to see ups and downs in the headline inflation rate over the coming months. But we expect core inflation to trend towards target levels.
So, this should let the UK, US and Eurozone central banks make more rate cuts. Real interest rates (central bank base rates minus inflation) are high right now, so there’s scope for lowering interest rates over the coming months.The current BoE rate of 5% is nearly 3% higher than the rate of inflation, at 2.2%.
This could change if the global economy unexpectedly slows, or if the improvement in core inflation reverses. And high levels of wage and service price inflation will curb the pace of cuts. We see these as risks to an improving outlook for inflation with steady economic growth.