UK core inflation in August is likely to fall slightly

UK CPI inflation increased to 0.1% y/y in July, from 0.0% y/y in June. The small increase in CPI inflation was due mainly to the timing of summer sales last year, as prices fell in July instead of June last year. Core inflation was 1.2% y/y in July, which was higher than expected. 

"The BoE wants to see CPI inflation stabilise/move higher before hiking and hence most MPC members are unlikely to feel comfortable with the near-term inflation outlook. The pickup in January should reduce concerns and thus the BoE is expected to deliver the first hike in Q1 16, probably in February (previously November 2015)", says Danske bank. 

Looking at the details, 'clothing and footwear' pushed the inflation rate up by 0.2pp, which, as mentioned, is a result of the timing of the summer sales in 2014. This is more than expected. Core inflation in August is likely to fall slightly as the base effects of the timing of summer sales fall out, hence, the surprisingly high core inflation in July should not be over interpreted. 

Food prices continued to decline and lowered the inflation rate by 0.1pp. Services inflation increased to 2.4% y/y in July, from 2.2% y/y in June. This is low from an historical perspective but still above the BoE's 2.0% target. Services inflation above 2% would be likely to make the BoE confident about raising rates in February despite headline CPI inflation being subdued. 

"EUR/GBP declined and GBP/USD increased following the release. EUR/GBP downside potential is likely to be limited due to low inflation, while GBP/USD is likely to decline on possible USD strength . We target EUR/GBP at 0.70 in 3M and GBP/USD at1.51 in 3M", added Danske bank.