UK consumer inflation to "fall sharply" through rest of 2023 - Lloyds

(Alliance News) - UK consumer price inflation should "fall sharply" through the rest of the year, analysis from Lloyds reiterated on Friday.

It expects the consumer price index to fall to around 4.4% by the end of 2023, which is marginally higher than its previous 4.2% forecast, but below current levels by 240 basis points.

Figures from the Office for National Statistics on Wednesday showed that the UK headline inflation figure cooled as expected last month, but core inflation proved stubborn.

Annually, consumer prices rose by 6.8% in July, cooling from a 7.9% jump in June. July's reading was in line with market forecasts, as cited by FXStreet. Lloyds said this was in line with its and the Bank of England's expectations.

The ONS said that falling gas and electricity prices were the largest contributor to the falling annual rate. A cooling in food inflation also helped.

Lloyds said: "That deceleration was largely due to the softening in goods prices inflation, to 6.1% [year-on-year] down from 8.5% the month prior. In contrast, services price inflation rose to 7.4% [year-on-year] in July from 7.2%."

On a monthly basis, UK consumer prices fell 0.4%, compared to a 0.1% rise in June. Market expectations had been for a 0.5% fall.

Core inflation - excluding energy, food, alcohol, and tobacco - was unchanged on an annual basis from June's reading of 6.9%. It had been expected to cool to 6.8%.

"The divergence between goods and services price growth is likely to remain a key theme throughout 2023. Second round effects point to upside risks for services inflation that could impede the expected deceleration in the headline inflation rate," said Lloyds.

"A key issue will be the extent to which housing market dynamics feed into higher rental prices. Rents rose 6.5% [year-on-year] in July the fastest rate on record and we expect rental price inflation to accelerate further in the coming months.

"More broadly, in the three months to June, private sector wage growth accelerated to its fastest comparable rate since records began in 2001 signalling the risk of sustained domestically driven inflation."

Lloyds also said that the previously announced increase in alcohol duty for some alcoholic drinks and higher fuel prices are "likely to exert sufficient upward pressure" in August, despite the sharp fall in headline inflation in July.

This could cause the headline inflation rate for August to stop falling or "possibly print marginally higher" than the 6.8% rate in July.

Despite this, Lloyds said it maintains the view that CPI inflation will fall sharply through the rest of 2023.

"The largest contributors to the deceleration are likely to be energy and food price deflation with the former having a negative contribution to headline CPI from October," Lloyds said.

It also noted that UK energy regulator Ofgem is expected to announce the price cap effective from October 1 on Friday next week. "We will revise our forecasts after that as necessary," said Lloyds.

Falling inflation would impact the decision-making of the Bank of England as to whether it should continue tightening its monetary policy. The next decision is due on September 21.

Earlier this month, the UK central bank enacted its fourteenth successive interest rate hike, lifting bank rate by 25 basis points, believing its monetary policy is now in "restrictive" territory.

The move took the benchmark bank rate to 5.25% from 5.00% previously, with a majority of Monetary Policy Committee members voting for the hike.

Across the world, central banks have been raising interest rates in a bid to curb inflation.

US Federal Reserve officials continue to see "significant" upside risks to inflation and suggested further interest rate increases may be necessary, minutes from the July Federal Open Market Committee meeting on Thursday showed.

At that meeting, the US central bank lifted rates by a further 25 basis points to 5.25% to 5.50%, the highest level in more than two decades, a rise that many economists believe will be the last of this cycle.

The next FOMC meeting will be held from September 19 to September 20. An interest rate decision is expected to be announced at 1900 BST on September 20.

At the end of July, the European Central Bank lifted eurozone interest rates by 25 basis points, as expected.

The decision by the ECB Governing Council took the interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility to 4.25%, 4.50% and 3.75%, respectively.

It means the Frankfurt-based central bank has hiked its policy rates by a cumulative 425 basis points during the current tightening cycle. Its next interest rate decision will be on September 14.

By Greg Rosenvinge, Alliance News reporter

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