Written by Millan Chauhan.
In the UK, headline inflation for June was lower than expected at 7.9% year-on-year, the lowest level since March 2022, and ended a five-month run where inflation came in higher than consensus expectations. As a result, UK assets performed strongly, with the FTSE All Share Index up +3.1% for the week.
The 7.9% Consumer Price Index (CPI) reading for June was down from 8.7% in May and its peak of 11.1% in October 2022. The significant drop from last month was thanks to a negative contribution from petrol and other liquid fuels. Food prices continue to remain stubbornly high, with a year-on-year increase of 17.3% in June.
Services’ prices also remained sticky, up 7.2% year-on-year. This is partly explained by labour making up a considerable amount of the overall cost within services and the high wage growth in the UK being a major activity behind this persistent element within core inflation. Labour markets are strong in many developed economies around the world, but the UK also faces a labour supply issue which has not recovered to its pre-pandemic peak, unlike in the US and the Eurozone.
While inflation remains high, the direction of travel saw a positive reaction in markets, as expectations for the Bank of England to hike rates by 0.5% in August dropped. Longer-term, market expectations still assume further rate hikes from the Bank of England but hopes are for a less aggressive approach as we near the end of the rate hiking cycle.
Japan also reported inflation numbers last week. CPI for June was 3.3% year-on-year, slightly ahead of expectations, however, the Bank of Japan appears to be more than happy to allow inflation to run ahead of target after several decades of deflation.
This policy appears to be aimed at allowing inflation to become part of Japanese consumers’ and companies’ mindsets, so that spending is not continually deferred in expectation of lower prices. This is almost the exact opposite of adjusting the UK consumers’ mindsets to reduce immediate spending in the expectation of higher prices.
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