Morning Market Brief: August 17, 2023

U.K. posts lowest inflation rate in two years 

Inflation is coming down in the U.K., in part due to the aggressive rate hikes from the Bank of England (BoE) over the past year and a half. But the decline doesn’t mean the U.K.’s challenges with inflation are complete just yet. Inflation remains elevated and well above the BoE’s 2% target, which could prompt more rate hikes by the U.K. central bank.  

• The U.K.’s annual inflation rate was 6.8% in July, its lowest year-over-year inflation since February 2022. July’s inflation number was down from June’s rate of 7.9%. It did, however, come in above the 6.7% rate economists were expecting, according to a survey by Bloomberg.
• Downward pressure on prices came from falling costs for fuels and lubricants, which dropped by 24.9% year-over-year. Meanwhile, price growth slowed for food and beverages, along with furniture and recreation.
• Core inflation, which excludes more volatile items, remained elevated at 6.9% year-over-year in July, unchanged from June.
• Producer price growth dropped for a second straight month, declining by 3.3% year-over-year in July.
• Despite July’s decline, U.K. inflation is still too high for the BoE and will likely keep the bank on track to lift interest rates further. The BoE has already raised rates at fourteen straight meetings to 5.25%.

The BoE and other major central banks, such as the U.S. Federal Reserve Board and Bank of Canada, are grappling with how to react to softening inflation that remains too high. While looking to push inflation down further, they need to tread carefully, as taking interest rates too high could push the economy into a recession. While it is difficult to predict how central banks might respond at upcoming meetings, we can safely expect an economic environment of higher interest rates for longer. Position your portfolio accordingly.

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