According to official CPI figures, UK inflation hit a new high of 4.4% in July – more than double the Bank of England’s 2% target. Apart from the typical culprits of rising food and energy prices, which now account for 1.2% points and 0.6% points respectively, core inflation has similarly surged ahead. As the numbers give us an alarming reading (this is the 11-year record), it’s time for the Governor to start drafting the third letter of explanation to the Chancellor due next month.

Recent softness in commodity prices and the fall back in retail spending in June could put off a rate hike at the MPC’s next meeting; however, July’s sky-high inflation figures suggest that a possibility of a rate cut can almost be ruled out in the short-term. The MPC certainly maintains its view that inflation is their top priority, and this will probably be highlighted today in its quarterly inflation report, due out at 10.30BST. We believe that the report will be relatively hawkish, reflecting much higher near-term inflation despite a recognition that the pace of economic growth is likely to slow further in the coming months.

On the foreign exchange markets, Sterling slid to its lowest level in almost 21 months, touching $1.8970 yesterday as the US dollar’s rebound continues.
Today is dominated by UK data, with the unemployment figures at 09.30, followed by June’s average earnings and at 10.30BST the BoE’s quarterly inflation report (Aug). At 13.30BST, the US reading for June’s retail figures will be released.

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