UK CPI Preview: Forecasts from six major banks, lowest headline inflation since February 2022

A close to 20% decline in Ofgem's energy price cap and base effects will likely bring headline inflation a full percentage point lower to 6.8% YoY – in line with the MPC's August forecast – while core should edge down to 6.8% YoY. The focus for the MPC will be on services inflation though, and here we look for continued elevated momentum to keep the YoY rate at 7.2% – leaving it marginally below the MPC's forecast of 7.25%.

We see only small falls in core (from 6.9% to 6.8%) and services (7.2% to 7.1%) inflation in July. For the headline rate, we are looking for a fall from 7.9% to 6.6% (note the BoE is looking for 6.8% for July).

A decline in utility prices could see headline inflation fall to its lowest level since the start of the Ukraine war at 6.8% in July, down from 7.9%, while we see easing goods inflation dragging core down by 0.1pp to 6.8%, confirming core reached its cyclical peak in May.

We expect July CPI inflation to undershoot the MPC’s headline forecast – if only very marginally – with core goods and food inflation complementing the large drop in household energy bills. Services inflation, will likely print in line, with a significant increase in rental prices once again a source of upward pressure. Core inflation will likely tick down marginally to 6.8% (BoE-implied: 6.9%), with undershoots on core goods inflation offsetting what – at the margin – will be a marginal overshoot on services, if with downside risks. Over the coming months, we expect disinflation to pick up steam as lower import and commodity prices continue to feed through. For the MPC, the focus will likely remain rigidly on services inflation, where undershoots are only likely from the start of Q4.

CPI inflation should fall from 7.9% to 6.6%, with core inflation down from 6.9% to 6.8%.

We see headline inflation at 6.8% in line with consensus, with core at 6.9%.