The inflation rate in the UK has decreased from 7.9% to 6.8% in July.

In July, the annual inflation rate in the UK decreased from 7.9% to 6.8%. This significant change is an important factor that could impact the monetary policy expectations of the Bank of England.

Highlights

• The annual inflation rate in the UK decreased to 6.8% in July.
• Food and beverages contributed to the decrease in the Consumer Prices Index including owner occupiers' housing costs (CPIH).
• Despite the decrease, inflation in the UK is still high, which raises the possibility of the Bank of England considering more aggressive policy measures.

The UK had a busy morning in terms of economic events, with the focus on the UK inflation report. The report had particular significance following strong wage growth figures and UK GDP numbers, as it could shape expectations for the Bank of England's (BoE) monetary policy.

In July, the UK's annual inflation rate decreased from 7.9% to 6.8%. Consumer prices also declined by 0.4% from June to July, compared to a 0.1% decrease in June. Economists had forecasted a 0.5% monthly decline in consumer prices, with an annual inflation rate of 6.8%. In June, the annual inflation rate had softened from 8.7% to 7.9%.

According to the Office for National Statistics, the consumer price index including owner occupiers' housing costs (CPIH) increased by 6.4% in July compared to 7.3% in June. The main contributors to the softer annual inflation rate were falling gas and electricity prices in the household and household services category, which rose by 5.4% year-over-year, contrasting with a 7.3% decline in June. Notably, the monthly rate of CPIH for food and non-alcoholic beverages also decreased from 17.4% to 14.9%. The Core CPIH, which excludes energy, food, alcohol, and tobacco, rose by 6.4% year-over-year, consistent with the rate in June.

Based on the CPI report, it is anticipated that there will be reduced expectations of aggressively increasing interest rates. However, with inflation remaining elevated, the report suggests that the BoE could still proceed with further rate hikes.

GBP to USD Reaction to UK Inflation Report

The GBP to USD exchange rate experienced fluctuations in response to the UK inflation report. Prior to the report, the exchange rate fell to an early low of $1.26871 and then rose to a pre-report high of $1.27123.

However, following the release of the UK inflation report, the GBP to USD exchange rate surged to a high of $1.27319, before subsequently dropping to a post-report low of $1.27084.

As of this morning, the GBP to USD exchange rate had increased by 0.02% to reach $1.27070.

Up next

In the UK, there are no scheduled speeches by members of the Bank of England's Monetary Policy Committee today. However, media discussions could still influence market sentiment.

The focus in the US will be on housing sector data and industrial production figures for July. The housing sector is considered a key indicator of the overall US economy, while industrial production numbers will also be closely watched.

Investors are interested in any signs that could deviate from the soft-landing theory, which suggests a gradual slowdown without a recession.

It should be noted that the industrial production figures are unlikely to have a significant impact on the Federal Reserve's monetary policy decisions. The manufacturing sector accounts for less than 30% of the US economy and is not a primary determinant of Fed policy sentiment. In contrast, any significant deterioration in the US housing sector conditions would draw attention.

Later in the session, the release of the Federal Open Market Committee (FOMC) meeting minutes will have an impact on the GBP/USD exchange rate. Following the 25 basis point interest rate hike in July, the minutes will provide insight into whether the FOMC members lean towards a more hawkish (favoring tighter monetary policy) or dovish (favoring looser monetary policy) stance. Positive economic indicators supporting further tightening may increase demand for the GBP/USD pair.

If the FOMC minutes reveal a more hawkish tone, this could test buyer appetite for the GBP/USD pair, especially as economic indicators suggest a stronger US economy.