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In our Market insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK inflation rate slows to lowest rise since March 2022
UK inflation fell to a 15-month low of 7.9 per cent in June, a bigger than expected drop that sent the pound falling, rallied property shares and came as a welcome boost for Prime Minister, Rishi Sunak as the UK observes its slowest rise in inflation since 2022.
Wednesday’s figures led investors to trim their expectations of an interest rate rise, with markets now betting on a quarter rather than half point increase at the Bank of England’s next meeting in early August. This latest data has made it more likely the Bank of England will raise interest rates by only a quarter of a percentage point next month.
Sterling fell to its lowest level in a week, trading down 1.1% against the dollar at $1.2897. Annual inflation was down from 8.7% in May, the Office for National Statistics stated, below the 8.2% predicted by a Reuters poll, therefore ending a four-month run during which inflation outstripped previous forecasts.
Markets now put a 60% probability that the Bank will increase the benchmark rate from 5 to 5.25% at the next meeting in early August.
Before Wednesday’s figures, they had been pricing in a better than even chance that the bank would increase rates by a half-percentage point to bring inflation back to its 2% target.
Traders expect BoE benchmark interest rates to peak just below 6% early next year. Before the inflation figures came out, they had anticipated a peak of just above 6%.
But despite such worries, shares in UK property groups and housebuilders surged as investors concluded that mortgage rates would now also rise less than they previously expected. Persimmon, Barratt and Taylor Wimpey rose 8.3%, 7% and 6.8% respectively, helping London’s FTSE 100 rise by 1.8% overall.
Land Securities, one of the UK’s largest landlords, and real estate group Segro were also among the FTSE’s biggest winners as the news broke.
One of the most closely watched metrics was the fall to 6.9% in core inflation, which strips out volatile food, energy, alcohol and tobacco prices. It had reached a 31-year high of 7.1% in the previous month, a level at which analysts had expected it to remain. Services inflation also eased to 7.2% in June from 7.4% in May.
Despite remaining at historically high levels, food inflation also fell to 17.3% in June, from 18.3% in the previous month.
Overall UK inflation remains higher than in other G7 countries, with economists blaming a combination of surging energy costs and labour shortages. In June, inflation slowed to a 27-month low of 3% in the US and to a 17-month low of 5.5% in the eurozone.
US inflation rises at the slowest pace in two years
The rate of price growth in the US dropped to its slowest pace in more than two years last month, helped by cheaper used cars and other commodities.
Inflation rose 3% in the year to June, according to the latest data, from 4% in May. Inflation has fallen sharply from a peak of more than 9% in June 2022 and the latest reading marks the slowest pace it has risen since March 2021.
The figures also suggest a succession of interest rate rises have punctured the soaring prices. However, analysts still expected the US Federal Reserve to raise rates again this month. The rise in US inflation in June was driven by higher housing costs, the Labor Department said.
In contrast, prices for used cars and trucks dropped while the cost of food stuffs such as pork, milk and eggs declined. Many households had been struggling with higher grocery bills after the war in Ukraine disrupted global food supplies.
The figures underscore the relatively rapid progress the US has made in curbing price increases, especially compared to the UK, where inflation hit 8.7% in the year to May despite a number of interest rate rises.
Officials have pointed to concerns about so-called core inflation. This measure strips out food and energy costs, which can vary month-to-month.
Core inflation has shown signs of stalling at a pace that would keep inflation higher than the bank's 2% target. But the latest data from the US Labor Department showed core inflation that was lower than expected. It rose by just 0.2% between May and June, the smallest increase since August 2021.
Core inflation slowed to 4.8% in the year to June, from 5.3% in the 12 months leading to May.
Stocks opened higher and the dollar fell following the report as investors bet it signalled that the Federal Reserve would be able to stop raising rates sooner, rather than later.
