Morning Market Brief: Thursday, July 20, 2023

UK inflation cools, aligning with international trend?

The UK’s inflation rate dropped to its lowest level in 15 months, according to data from the Office for National Statistics (ONS). Annual consumer price growth in June cooled to 7.9% from the previous month’s 8.7%, marking the first lower-than-expected reading in five months.?

• The ONS attributed the drop in the inflation to falling gas prices for motorists and a smaller increase in grocery bills. Transport prices declined 1.8% in June versus a 1.2% decline in May.
• The UK’s inflation remains elevated, in contrast to the US and Canada, where the Consumer Price Index dipped back to 3% and 2.8% in June, respectively. However, Wednesday’s UK data indicates closer alignment with international peers. In response, economists recalibrated expectations for the Bank of England’s terminal interest rate of this cycle towards a lower peak.
• In Europe, Eurostat’s preliminary data revealed that consumer prices in June rose 5.5% year-over-year, the slowest increase since January 2022.
• Volatility in bond yields, which have repeatedly repriced interest-rate expectations, could persist as market dynamics continue to evolve.
• A lower UK energy price cap, which limits household energy bills, is expected to contribute to a further decline in inflation in July.

Given these developments, it is important to monitor the impact of cooling inflation in the UK and beyond on your portfolios. The UK has faced steeper inflationary pressure than other developed economies. However, the trending alignment with international peers could have implications for investment strategies and asset allocation decisions. Preparing for the potential effects of evolving interest-rate expectations on bond markets is also crucial for managing portfolio volatility.

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