How far will UK inflation fall? 

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How far will UK inflation fall?

The stakes are high for the UK’s July inflation print, which will be published on Wednesday, after the Bank of England slowed its tightening campaign last week by lifting interest rates by 0.25 percentage points, a smaller increase than the half-point rise the previous month. 

Economists polled by Reuters expect the annual inflation rate fell to 6.7 per cent in July, slightly lower than the BoE’s 6.8 per cent forecast, and a significant drop from 7.9 per cent in June.

Beyond the headline rate, investors will be closely watching core inflation, which strips out volatile food and energy prices and is viewed as a better gauge of underlying price pressures, and has been slower to retreat. Edging down only slightly last month to 6.9 per cent, economists polled by Reuters expect a rate of 6.8 per cent in July.

The central bank was given some breathing space last month when June’s ion came in below forecasts, following four consecutive months of hotter than expected prints. July’s inflation release brought good news for the US Federal Reserve this week with a headline rate of 3.2 per cent, slightly lower than analysts had expected. 

But stronger than expected UK GDP growth in the second quarter published on Friday has left some doubt among analysts about the extent to which tighter policy is feeding through. “I believe that wage growth data will surprise the Bank of England to the upside next week,” said Tomasz Wieladek, chief European economist at T Rowe Price.

Attention will be paid specifically to UK services inflation next week, which the BoE monitors as an indicator of medium-term inflationary pressures and has been consistently sticky, easing only to 7.2 per cent in June from a peak of 7.4 per cent in May. Mary McDougall

What will the Fed minutes say about the outlook for rate rises?

Investors will be watching the release on Wednesday of the Federal Reserve’s minutes from its July meeting for insight into the deliberations officials have had about whether the central bank should raise interest rates again this year. 

After pausing in June the Fed raised its crucial policy rate to a range of 5.25 per cent to 5.5 per cent at its July meeting, when it maintained that inflationary pressure remained “elevated” and cited the hot jobs market and consistent economic growth. 

While the likelihood of a recession in the US in the near term remains low, inflation has since cooled further. Headline inflation rose less than expected in July, with the core inflation category, which strips out the volatile food and energy components of the calculation, increasing at 0.2 per cent, the same pace as in June. The annual rate was 4.7 per cent, down from 4.8 per cent in June, and the lowest level since October 2021.

This points to the Fed having some leeway to hold off from a further rise at its September meeting. Kate Duguid

Will China’s latest economic data lighten the gloom?

Deflation, declining trade and surging debt — there has not been much in the way of good economic news out of China since the abrupt abandonment of strict Covid-19 controls late last year. 

Investors who only a few months ago tipped China to rebound from the pandemic in explosive fashion now face growing evidence of slowing momentum across the world’s second-biggest economy. Industrial output and consumer spending figures due to be published on Tuesday by the National Bureau of Statistics will provide another glimpse of the state of China’s recovery.

After retail sales increased by 3.1 per cent in June, economists polled by Reuters are forecasting a year-on-year rise of 4.7 per cent in July, though that would still mark a sharp slowdown from 12.7 per cent growth in May. Annual industrial output for July is expected to have increased 4.4 per cent, in line with growth the previous month. 

Analysts at investment bank China International Capital Corporation expect both measures of economic activity to improve from June, even as the pressure of a “financial down-cycle” weighs on activity. Fresh high-frequency data shows a pick-up in hotel occupancy rates, box office revenue at cinemas and domestic flights, all of which should “enhance” sales of goods including clothing, cosmetics and jewellery, said CICC analysts Wenlang Zhang, Wenjing Huang and Yuchi Zheng.

However, they added that retail sales growth of other goods may decelerate in July “due to a high base for comparison”, with sharp declines forecast for car sales and home appliances.

Manufacturing activity also contracted in July, albeit at a slower rate than in June. A marginal improvement in demand may help industrial output rebound by 5.2 per cent, according to CICC. George Steer