Let’s jump right into this. The first thing to note is that headline annual inflation is estimated to fall from 7.9% in June to 6.8% in July. That sounds about right given the near 20% decline in household energy bills but also as food price inflation is supposedly coming further off the boil from its recent peak.
All of that sounds good on paper but in actuality, food price inflation continues to hold on the high side and remains a problem for many households. Adding to that, services inflation is also remaining stubborn and that won’t provide much comfort for the BOE to rest on its laurels.
The more important number to pay attention to is perhaps core annual inflation. That is estimated to come in at 6.8%, just down a touch from the 6.9% reading in June. In that sense, core price pressures are continuing to hold higher and that will just reaffirm prevailing market sentiment of yet another rate hike in September.
So, what’s priced in going into the inflation data today?
A 25 bps move is already more than 100% priced in with the OIS market even seeing a measly 8% odds of a 50 bps move next month. The jump in pricing came after the hot UK wages data yesterday, with the peak in rates now seen at around 5.91% i.e. roughly three more rate hikes.
I reckon 6% rates is the level where traders will continue to draw the line in terms of maximum hawkishness when considering the BOE outlook. Unless the inflation figures today surprise to the upside strongly, there should be not much repricing of the odds above even if headline annual inflation may beat estimates a little. The core reading will be the main one to watch.
In that lieu, the risks to the report is more to the downside for the pound and for UK yields. If we do see the core reading come off a little more than anticipated, there might be a nudge lower in the current market odds for peak rates. I would still expect a 25 bps move for September to hold but at least it will tone down the more hawkish expectations in the outlook for next year. In turn, that should weigh on the pound, all else being equal.