UK Inflation Data Holds the Key for August Rate Hike Decision

UK inflation data to make-or-break a 50bp August rate hike

After some unexpectedly strong wage data last week, Wednesday's services inflation data will determine whether the Bank of England implements another aggressive 50bp rate hike in early August.

 

Services inflation is key for the Bank of England

Whether or not the Bank of England repeats June’s 50 basis-point rate hike in two weeks comes down to one number in the UK inflation data due on Wednesday. That number is services inflation, and it’s likely to stay at 7.4%, its highest level in over 30 years. This is the bit of the inflation basket that the Bank of England is most interested in – it tends to exhibit the most persistent trends, and is generally less volatile than the likes of energy or goods.

Until now our base case has been for a 25bp rate hike when the BoE meets in early August. But unexpectedly strong wage data last week has moved the dial closer to a 50bp move, and that would be further cemented if Wednesday’s services inflation figure rises once again.

 

Hospitality has been a key driver of higher services inflation

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If various surveys are to be believed though, services inflation should be at its peak. Indeed if we look at hospitality – a key driver of services inflation over recent months – there are already signs of disinflation, which could be linked to the sharp fall in gas prices. Data from a January ONS survey of businesses showed that energy prices, much more than wage costs, was the primary driver of higher consumer prices in hospitality through winter.

By that logic, lower gas prices should help ease service sector price pressure over the coming months, and indeed the latest version of that ONS survey shows the percentage of hospitality firms that are expecting to raise prices has tumbled from 46% in April to 26% now. That signals disinflation in the services sector through the rest of the year, albeit stubbornly-high wage growth will ensure that’s a slow process.

Admittedly we might have to wait until later in the summer before this trend becomes more apparent, and for now the Bank of England appears sceptical that improvements in forward-looking inflation indicators are translating into better actual CPI figures. Like us, the BoE expects services inflation to flatline in the near-term, and any deviation above or below last month’s reading will be what helps cement either a 25bp or 50bp hike in early August.