UK CPI Preview: Forecasts from four major banks, inflation to determine size of August rate hike

We expect UK inflation to fall from 8.7% to 8.1% YoY in June on the back of a drop in energy inflation. We expect core inflation to fall from 7.1% to 7.0% YoY. We expect retail sales to fall by 0.3% MoM in June.

Base effects and another decline in petrol prices will likely pull down headline inflation to 8.1% YoY – just 0.2ppts above the MPC's forecast. That said, we expect core inflation to remain at 7.1% YoY due to continued elevated services momentum. Material surprise on this release will determine the size of August's Bank Rate hike.

Favourable base effects should help headline CPI inflation ease from 8.7% to 8.2% in June, meaning, if our forecast comes to fruition, 2Q CPI will overshoot the Bank of England’s forecast in the May MPR by 0.3pp. More worryingly for the Bank, we expect core will remain unchanged at 7.1%. With our expectation that core inflation remains unchanged at 7.1% in June, coupled with the continued acceleration in wage growth in the past week, it should keep the Bank hiking. But whether the Bank downshifts to 25s bp or hikes by another 50 bps is less certain, with any upside or downside surprise to the CPI data possibly swinging the Bank’s decision. Our forecast is for a downshift to 25 bps, in the expectation that more convincing signs that the labour market is cooling will steadily build up.

We should see headline CPI dip noticeably, though this is largely because last June’s near-10% surge in fuel prices won’t be matched – and in fact, petrol/diesel pump prices were down by 2.6% last month. Food inflation should also decline modestly too, not least because producer price inflation has been easing for several months now. Core inflation should inch slightly lower too, though it’s the services component that matters most to the BoE, and we expect this to stay at 7.4% – a post-Covid high. This is also the Bank of England’s expectation, according to the June meeting minutes. Assuming we’re right on services inflation, August’s meeting then becomes an extremely close call. The latest pay data came in hot but was balanced out by some better news on the supply of workers. A further rise in services CPI would probably cement another 50 bps move, and a downside surprise would probably nudge the dial in favour of a 25 bps move.