UK inflation provides mixed signals for monetary policy

UK CPI inflation remained unchanged at 2.4% in June, for the third month in a row . CPI incl. owner occupiers’ housing costs (CPIH) also remained unchanged, at 2.3%. Clothing sales and entertainment goods exerted downward pressures on the price index, although they have been offset by higher energy prices; notably petrol . However, core CPI (excl . prices for volatility-prone goods such as energy and food) eased to 1.9% from 2.1% a month earlier, partly reflecting tamed wage growth. Last, house prices witnessed their weakest growth in five years, at 3.0% (-0.4% for London). After a slow start to the year, output growth has resume d in Q2 likely reaching the BoE ’s forecast of 0.4% q/q . On the inflation side, we deem likely that the BoE overlooks the current lack of momentum since higher petrol prices will have second-round effects on core CPI in the months to come. Also, the ever-increasing tightness in the labour market should exert upward pressures on wages giving support to core inflation. As such, we see the conditions for an interest rate hike as being met and maintain our call of the MPC voting in favour of a 25bp hike on August 2 nd .