UK inflation set to ease back faster than expected, says IMF

Danni Hewson, head of financial analysis at AJ Bell, said: “As many households are struggling to stay cool in the third heatwave of the year, the fact that the energy price cap edged up at the start of the month will be something causing pain now and not just a problem for winter months.

“Keeping fans running and lights switched on whilst the curtains close out the full glare of the sun, will be adding to the pressure on budgets still uncomfortably tight for many and could eat into that cushion many people build up over the summer to help offset increased energy use during winter months.

“But there’s also a feeling that the coming cost of living squeeze won’t be as bad as many people had feared, something backed up by the latest forecast from the IMF.

“Whilst inflation is still expected to head higher this year it’s now not expected to peak as high or linger as long as had been feared back in the spring.

“There are no guarantees and the skirmishes between the US and Iran today have sent the price of oil higher, though still no where near levels seen in April.

“Whilst another blockade in the Strait of Hormuz would create further challenges, global businesses have proved remarkably resilient and market reaction suggests most are betting that it’s in Trump’s best interests to get a deal over the line.

“Whilst cooling inflation means prices won’t rise as quickly as they might have done, prices will still go up and with the labour market tight, pay increases are set to be muted, something which could be seen as a double-edged sword.

“If wage growth only keeps pace with inflation people won’t feel any better off, they’ll just feel like they’re treading water. But wage growth is something the Bank of England keeps a close eye on as it tracks any secondary impacts as inflation edges up through the year.

“With the IMF now predicting that inflation will fall back to the Bank’s two per cent target by the middle of next year, UK rate setters might feel justified to continue their wait and see approach for the rest of the year, although markets are still pricing in a 21 per cent chance of a quarter percentage point hike at the next meeting later this month.

“What will be pleasing to the current chancellor is news that the path of UK economic growth has also been upgraded by the IMF. But that growth is still only expected to clock in at one per cent which suggests resilience rather than robustness.”