The Office for National Statistics (ONS) released the June inflation data today, indicating that the Consumer Price Index (CPI) has remained at 2% for the second month in a row. This figure exceeded analyst predictions, which had anticipated a slight dip to 1.9%. In addition, the Services CPI saw a significant year-on-year increase of 5.7%.
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What This Means for The Pound
The pound-to-US dollar exchange rate rose very marginally on the release of this information, suggesting that the markets are not immediately concerned about this data release. It’s likely that the market will be waiting to see if inflation continues to hold at this level or rises again. The Bank of England has indicated to the market that inflation may rise slightly before continuing back down as economic activity in the summer increases.
With inflation remaining at 2%, it suggests that the Bank of England could consider lowering interest rates. However, they may still be cautious about cutting interest rates too early, which could cause a spike in inflation. Consequently, it is likely that both the Bank of England and market participants will continue to wait and see further data before making any significant moves.
Services CPI
Although headline inflation is at the Bank of England’s target of 2%, Services CPI remains on the high side, rising by 5.7% year-on-year in June 2024, the same level as in the May report. This elevated Services CPI could be another factor holding the Bank of England back from cutting rates too soon. As services make up a large part of economic activity, the central bank might be waiting for more signals that Services CPI is coming down before making any rate adjustments.
Upcoming Budget and Labour Actions
There remains the unknown variable of the actions that will be taken in the upcoming budget by Rachel Reeves. These fiscal policies will likely be a driver of inflation and asset reallocation towards the end of this year and early next year. Changes in government spending, taxation, and other economic measures could significantly impact inflation trends and, consequently, the Bank of England’s monetary policy decisions.
Breakdown of the Release
Main Points
- The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.8% in the 12 months to June 2024, the same rate as the 12 months to May 2024.
- On a monthly basis, CPIH rose by 0.2% in June 2024, the same rate as in June 2023.
- The Consumer Prices Index (CPI) rose by 2.0% in the 12 months to June 2024, the same rate as the 12 months to May 2024.
- On a monthly basis, CPI rose by 0.1% in June 2024, the same rate as in June 2023.
The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from restaurants and hotels, where hotel prices rose more than a year ago. The largest downward contribution came from clothing and footwear, with garment prices falling this year compared to a rise a year ago.
- Core CPIH (excluding energy, food, alcohol, and tobacco) rose by 4.2% in the 12 months to June 2024, the same rate as in May.
- The CPIH goods annual rate fell from -1.3% to -1.4%.
- The CPIH services annual rate rose from 5.9% to 6.0%.
- Core CPI (excluding energy, food, alcohol, and tobacco) rose by 3.5% in the 12 months to June 2024, the same rate as in May.
- The CPI goods annual rate fell from -1.3% to -1.4%.
- The CPI services annual rate remained at 5.7%.
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