Weekly Comment: Inflation data moves higher

Market overview 

Inflation metrics on both sides of the Atlantic moved higher in June, providing food for thought for central bank rate setters ahead of upcoming monetary policy meetings. The UK consumer price index hit an 18-month high of 3.6%, unexpectedly rising from the 3.4% prior reading. Higher petrol prices, rising airline and rail tickets and strong clothing and food prices contributed to the increase, with the latter suggestive of businesses passing on at least some of the rises in national insurance contributions and minimum wages to consumers.

The print means UK inflation continues to track well above other large European economies, with the equivalent reading for Germany 2% and across the European Union 2.2%. Financial markets still believe there’s a high chance of a Bank of England (BoE) rate cut next month, but the rise brings into question whether there will be less reductions going forward. Rate setters find themselves in the unenviable position of having to deal with rising inflation and slowing economic activity, as the UK economy contracted for a second consecutive month in May as the bright start to 2025 fizzled out.

The BoE has delivered four 25 basis point (0.25%) cuts since last summer to leave the base rate at 4.25%. At its last meeting members voted 6-3 in favour of maintaining the rate, showing a differing range of views as to the appropriate policy rate.

While the rise in UK inflation was unexpected, the US reading was in line with consensus forecasts and, if anything, seen as mildly reassuring given concerns about faster rising price pressures from trade tariffs. The US consumer price index rose 2.7% in June, up from 2.4% in May. Core inflation, excluding volatile items such as food and energy, was up 2.9%.

Federal Reserve chair Jerome Powell has been under increasing political pressure to lower interest rates but will feel like this data supports his wait-and-see approach. Although the gains are modest, they are still present and suggest that there will be some pass through from tariffs to consumers. US consumers will end up paying 70% of direct tariff costs, according to Goldman Sachs.

Reports that Donald Trump was considering firing Jerome Powell caused a clear negative market reaction last week, with bond yields spiking higher and stocks dipping. A swift rebuttal saw the moves reverse, but the reaction serves as an indication of how financial markets would react to a move to bring Powell’s term, which is set to expire around the middle of next year, to a premature end.

Weekly economic announcements:

Last week the MSCI All Country World Index rose 0.6% (11.6% YTD).

United States:

US stocks added 0.6% (7.8% YTD) to hit new all-time highs. Economic data was broadly supportive and the start of corporate earnings season also brought some reassurance to investors. Leading US banks, such as JP Morgan and Citigroup, posted better than expected results, along with PepsiCo and Netflix.

Growth stocks outperformed value stocks and small caps lagged large caps. Tech stocks outperformed to rise 1.5% (8.6% YTD).

United Kingdom:

UK equities tracked global benchmarks to rise 0.6% (12.4% YTD), lifted in part by exchange rate moves as sterling depreciated to US$1.34, from US$1.35. The 10-year gilt yield rose 5 basis points to end the week at 4.76%.

Europe ex UK:

The MSCI Europe ex UK returned -0.3% last week (+10.4% YTD), with major indices mixed. German benchmarks gained 0.1% (22.0% YTD), French indices returned -0.1% (+9.1% YTD) and Italian equities added 0.6% (22.0% YTD). The euro ended the week at US$1.16, down from US$1.17.

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