Above forecast UK June inflation questions expectations for BoE rate cut in August

British inflation was unchanged at 2.0% in June, missing forecasts for a slight fall (1.9%), with strong underlying price pressures hurting bets for the Bank of England’s first rate cut since 2020 in the next month’s policy meeting.

Inflation for services was 5.7%, unchanged from May, but above forecast for 5.6% increase, with higher hotel prices during the tour of US pop star Taylor Swift, being the top contributor to the higher than expected June numbers, although inflation in the UK was now lower than in the United States and the Eurozone.

Economists point to the service sector as an inflation generator, that limits the space for maneuver for the Bank of England to cut rates this year.

Bets on a BoE rate cut on August 1 meeting have dropped from around 50% to 35% after the data while sterling rose above psychological 1.30 barrier and hit new 2024 high against the US dollar, in immediate reaction.

On the other hand, a number of analysts think that fresh rise in consumer prices might be short-lived, due to key factors that caused rise in prices, but remain concerned about the strength of services inflation, which fuels wage growth, as labor market faces shortages in new employees.

Markets await release of UK May labor report on Thursday, to get more clues about the conditions in the labor sector, which is one of top contributors to the central bank’s policy decision.