Susannah Streeter, Chief Investment Strategist, Wealth Club: “UK inflation has eased to 2.6% in June, with some of the heat coming out of rapidly rising prices, offering some short respite for households and pushing the threat of interest rate hikes a little further into the distance. The fall was steeper than some forecasts, but it's still above the bank's 2% target. Also, it's not likely to be long before the temperature rises again, with fresh attacks in the Middle East and the Black Sea threatening to keep prices on the boil. Brent crude has raced upwards again, to trade around $93 a barrel, the highest level in six weeks, and this snapshot of prices won’t capture this unwelcome development. Transport costs were the biggest downward driver of the headline rate of inflation, with prices of motor fuel coming down markedly, but with oil prices becoming painfully hot again, it'll soon show up at the pumps and filter through to other consumer prices via higher freight and energy costs.
Core CPI, which strips out volatile food and fuel prices and is monitored closely by the Bank of England, also came in at 2.6%. Price rises for goods have slowed quite markedly, but services inflation is proving stickier, falling only a little to 2.6%, above expectations. The pound initially rose before losing ground as investors assessed the conflicting signals for interest rate policy. While the fall in the headline rate is welcome news, stubbornly high core inflation, a sluggish economy and the Middle East crisis are set to keep Bank of England policymakers on alert. However, it still looks likely they'll adopt another wait-and-see stance at the meeting later this month, with an interest rate hike not fully priced in until close to the end of the year.
Policymakers will be monitoring closely how the war with Iran filters through to everyday prices. Risks to supplies are mounting again, with the effective blockage of the Strait of Hormuz remaining a chokehold as tankers are stranded in and around the waterway, while risks to other crude routes are also intensifying. Both the Red and Black Seas are fast becoming the latest flashpoints. President Trump has dashed hopes for imminent talks, threatening to ramp up attacks on Iran if Houthi rebels are drawn into the conflict and begin disrupting the Red Sea route for oil shipments. As the conflict in Ukraine rages, with drone attacks on tankers serving Russia's Caspian Pipeline Consortium on the Black Sea coast, Kazakhstan has been forced to halt crude exports through the port. Both conflicts, which look increasingly intractable given the lack of momentum behind diplomatic solutions, are threatening to choke vital energy supply routes and keep a firm floor under oil prices, raising the risk that inflationary pressures flare up once again. If they drag on, this could prove to be the low point for inflation before price pressures start building again through the second half of the year.
The new Burnham administration is trying to build a buffer against a fresh cost-of-living squeeze amid the threat of higher prices. Following yesterday's VAT cut on household electricity bills, today's £2 bus fare cap is another attempt to put money back into consumers' pockets before higher energy costs start filtering through the economy. For many households, particularly those reliant on buses to get to work, the savings will offer an immediate salve to what have become painful everyday costs. But in many ways policymakers are in a race against forces beyond their control. If conflict in the Middle East keeps oil prices simmering near recent highs, the relief offered by cheaper electricity and transport could quickly be eroded by rising fuel, freight and wider consumer costs. The cost-of-living battle may be getting a helping hand from government, but it is still likely to be fought on the global stage.''
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