(Bloomberg) -- Britain recorded stronger-than-expected inflation in its services sector in June, prompting traders to walk back bets on an interest-rate cut by the Bank of England next month.
Services inflation, which policymakers have been watching for signs of continued domestic price pressures, held steady at 5.7% for the second straight month. That compares with the 5.6% rate expected by economists immediately before the data’s release and the 5.1% level that the central bank’s most recent forecasts had anticipated by now.
The increase was largely driven by hotel and restaurant prices as the effects of an almost 10% rise in the minimum wage and the arrival of Taylor Swift’s The Eras Tour filtered through the economy. Persistence in services inflation will further complicate calculations before Governor Andrew Bailey announces the BOE’s next decision on Aug. 1, even with headline inflation holding steady at the official 2% target.
“The data today challenge the idea of a cut in August,” said Tomasz Wieladek, chief European economist at T Rowe Price. “Inflation is not yet coming down in a sustainable fashion.”
Traders pushed back bets on a rate cut next month, pricing in a roughly 30% chance of an August move, down from almost 50% on Tuesday. The pound erased losses to trade 0.4% stronger at about $1.30 for the first time in a year, as traders priced in the prospect that the Federal Reserve may cut rates before the BOE.
Gilt yields rose across the curve, with the two-year rate rising as much as seven basis points to 4.06%, although that’s still around the lowest level this year.
While the UK’s newly elected prime minister, Keir Starmer, will welcome a stronger pound, his government won’t want to see Britain’s mortgage holders wait much longer for a rate cut. Starmer and his chancellor of the exchequer, Rachel Reeves, have blamed the Conservative government that left power on July 5 for weakening the currency and pushing up mortgage costs.
The figures come days after the economy recorded growth of 0.4% in May, double the pace that had been expected. It points to another solid quarter of expansion, continuing a recovery from last year’s mild recession.
“Today’s data should close the door on an August rate cut,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management. “This inflation print, coupled with ongoing resilience in economic activity is likely stronger than the data the bank is looking for to start cutting rates.”
Prices for restaurants and hotels rose by 6.3% in the year to June, up from 5.8% in May, according to Office for National Statistics data. The increase in the annual rate was almost entirely down to hotel room prices, which saw a monthly rise of 8.8%.
A tight labor market and the minimum wage increase that took effect in April are forcing companies to pay more to attract staff. Tomorrow’s jobs data will provide a further reading of underlying inflationary pressure in the labor market.
BOE officials, notably Chief Economist Huw Pill, have expressed concern about lingering inflationary forces in the labor market and services sector.
Economists said there were also some signs that Swift’s UK tour in June, which included events in Edinburgh, Liverpool, Cardiff and London, may have also provided a temporary boost to the services inflation figure. The ONS collected data for hotel prices between concerts in Edinburgh and Liverpool, while the figures showed Swift is likely to have also boosted live music ticket prices. The effect may continue in August, when Swift returns for more dates in London.
What Bloomberg Economics Says ...
“The stickiness of both headline and services inflation in June’s CPI print has lowered the chances of the Bank of England easing at its August meeting. On balance we’re sticking to our call that rates will fall next month — the central bank has shown some tolerance for upside data surprises.”
—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.
“Hotel prices rose strongly while second-hand car costs fell, but by less than this time last year,” said Grant Fitzner, chief economist at the ONS. He added that these were offset by falling clothing prices after “widespread sales.”
Prices of food and non-alcoholic beverages also continued to ease, rising by 1.5% in the year to June 2024, the lowest rate since October 2021. The rate has eased for 15 months running now from a high of 19.2% in March 2023, the highest annual rate seen for over 45 years.
Factory gate prices, paid by retailers, rose 1.4% on an annual basis, down from 1.7% in the year to May. Growth in input prices, paid by producers, dropped to 0.4% from 0.7% as fuel costs continued to decline.
“It is welcome that inflation is at target, but we know that for families across Britain prices remain high,” said Darren Jones, chief secretary to the Treasury under Reeves.
This month’s figures will help shape debate at the BOE on when to lower the benchmark lending rate, which officials left at a 16-year high for almost a year in order to curtail price pressures. Pill and others have signaled they want to see more concrete evidence that price pressures are subsiding before loosening policy.
The nine-member Monetary Policy Committee suggested in June that more officials were on the verge of backing a reduction, although some of its more hawkish members have voiced their opposition in recent weeks. Pill along with rate-setters Catherine Mann and Jonathan Haskel all raised concerns over how quickly underlying pressures are cooling after a communications blackout during the election campaign.
“Inflation stays on target, but honeymoon period may not last,” said Yael Selfin, chief economist at KPMG UK. “Our latest analysis sees UK inflation potentially rising to a high of 3% before the end of the year.”
--With assistance from Andrew Atkinson, Harumi Ichikura and Isabella Ward.
©2024 Bloomberg L.P.
