he City today welcomed the sharp fall in the Consumer Price Index but warned that “sticky” core inflation means it is too early to call the peak of the interest rate cycle.
While headline inflation dropped in line with forecasts to 6.8%, core CPI, which excludes energy, food, alcohol and tobacco and is seen as a better indicator of underlying prices, rose by a higher than expected 6.9%, unchanged from June.
Analysts were also alarmed by the services consumer price index, which rose slightly from 7.2% to 7.4%.
The economics team at Nomura said in a note: “July inflation data printed stronger than expected, driven almost entirely by an upside surprise to services prices, and excess core momentum rose on the month.
“The debate on Bank Rate had been for only one more hike versus two more. Yesterday’s strong wage growth and today’s resilient services CPI data will likely push the BoE to, in our view, hike twice more, bringing Bank Rate to 5.75%.”
Gilt yields were mostly slightly up this morning although the benchmark two year bond fell around 2 basis points to just under 5.1%.
Althea Spinozzi, Senior Fixed Income Strategist at investment bank Saxo, said: “July inflation prints out today show that core inflation remains sticky, beating expectations slightly.
“The data cement a rate hike for September with the only question being if it will be 25bps or 50bps. We believe that 50bps might be on the table, but it depends on August inflation and jobs data. We expect the UK yield curve to bear flatten further, with two-year yields soaring to test again 5.5%.”
There was also stronger than expected data from the property market. The Land Registry said that London house prices rose 0.5% during June to an average of £527,979, still within touching distance of all time highs. Year on year prices were down 0.6%.
North London estate agent Jeremy Leaf, a former RCS residential chairman, says: “The ONS figures are particularly interesting as unlike other housing market surveys, they include cash transactions. We have certainly found in our offices in recent times that it is the cash purchasers who continue to make best use of their bargaining power.”
He added: “Although this is a little dated, it is clear that activity overall is holding up perhaps better than expected as buyers and sellers shrug off the mortgage mayhem of the last few months.”
Marc von Grundherr, director of London agents Benham and Reeves, said: “Another index and yet further evidence that while the market may be subdued at present, it’s far from teetering on a cliff edge.”