UK inflation casts further doubt over near-term rate hike - ING

July was another disappointing month for UK inflation and whilst even today's sub-consensus inflation data might continue to test the patience of Bank of England hawks, a rate hike this year is looking increasingly unlikely, according to James Smith, Developed Markets Economist at ING.

Key Quotes

“Both headline and core CPI remained unchanged in YoY terms as the impact of the pound's fall failed to offset a 1.3% decline in petrol prices. It's hard to pinpoint the weakness to any one-off quirks, but sizable declines in the prices of clothing, footwear and household goods may potentially suggest that retailers have again had to cut prices to get shoppers buying their summer wares.”

“Whatever the reason though, we still think headline inflation looks set to inch closer to 3% towards the end of this year as the full extent of sterling's near-20% fall since November 2015 filters through. But the big question for policymakers is where inflation would be if this currency effect is stripped out. One way of looking at this, by excluding goods with a high import-intensity, suggests that inflation would be slightly below 2% if the pound's fluctuations are removed.”

“But what matters for the Bank of England is wage growth. We expect this to hold steady at 2% tomorrow, and in fact, for much of the rest of this year. The combination of slowing economic momentum, political uncertainty and rising import costs mean that firms are likely to have limited incentive to accelerate pay rises.”

“While today's data will continue to test the patience of some BoE hawks, we expect the committee as a whole to continue 'looking through' inflation spikes in favour of slower growth. We don't expect a rate hike this year.”