UK services inflation is a headache

The pound is flat today at 1.2715 in part because the US is on holiday but there was some minor selling earlier after a softer UK CPI print. Inflation was up 0.3% m/m compared to 0.4% expected but it was deeper within the report there was trouble as services inflation was hotter than anticipated.

Deutche Bank called that portion of inflation ‘the fly in the ointment’ despite inflation returning to the 2.0% y/y target on the headline.

“What
drove the upside surprise to services? While weak goods demand pulled core
goods prices down, strong spillover effects from April lifted services CPI
higher in May. Moreover, a stronger airfares print coupled with a spike in
mobile phone application fees pushed services CPI a little higher than we
thought.”

There are some base effects that have been helping UK inflation that will fall out in the months ahead and that’s why they see CPI north of 2.5% y/y in teh second half of the year.

So despite the headline getting cooler, they think this report makes it less likely the Bank of England will lower rates in August.

“While calls for an imminent rate cut will grow, given
headline CPI’s descent to 2%, there’s likely to be growing concerns around the
stickiness surrounding services inflation. Indeed, today’s data showed an
increase in the MPC’s forecast error, with services CPI – the key inflation
gauge monitored by the MPC – drifting 40bps higher compared to the Bank’s May
MPR projections. As we noted
last week, an August rate cut is not a done deal. And today’s CPI report will –
we think – raise the bar for a summer rate cut.”

This article was written by Adam Button at www.forexlive.com.