Rabobank’s Senior Macro Strategist Stefan Koopman notes UK headline CPI fell to 2.6% in June, below the MPC\u2019s forecast, with broad-based downside surprises and easing domestic pressures. However, Koopman argues that renewed energy price increases and recurring shocks mean inflation is likely to move back above 3%, implying that 3% may effectively replace 2% as the UK\u2019s de facto inflation norm over coming quarters.<\/p>\n
From target undershoot to renewed pressures<\/p>\n
“And Wednesday saw headline CPI inflation falling to 2.6% y\/y in June, 0.5pp below the MPC\u2019s April short-term forecast of 3.1%. The downside surprise was broad-based across food, core goods and services, with a particularly notable contribution from food price inflation, which has slowed to just 1.7% y\/y. While this was the lowest reading in 15 months, we expect inflation to return to 3%+ soon.”<\/p>\n
“After a brief pause, energy markets have again become a central risk to the inflation outlook. Crude oil prices have surged following the collapse of the US-Iran ceasefire and renewed disruption to shipping through the Strait of Hormuz. Ukrainian attacks on Russian refining capacity have added further pressure by tightening global diesel and refined product markets.”<\/p>\n
“The longer elevated energy prices persist, the greater the risk of second-round effects in price and wage-setting. And even if energy prices stabilise and fail to rise further, this will remain a key focus for policymakers in the months ahead.”<\/p>\n
“The MPC warned in June that the risks to its energy-price outlook<\/a> were skewed to the upside. We agreed, seeing the MoU as fragile and easily undone.”<\/p>\n “We expect the MPC to revisit its energy assumptions and, as in April, present alternative scenarios to show the potential inflation impact of a prolonged supply shock. The risk is that this creates more noise than signal.”<\/p>\n