Inflation flies higher

• UK equities, which advanced +2.1%
• Brent crude oil, which recovered +2.9% in US dollar terms

• Japanese equities, which declined -0.6% in local currency terms
• Sterling, which weakened against the dollar, euro and yen

The headline annual rate of inflation in the UK accelerated to 3.8% in the year to July, up from 3.6% in the year to June. Last week, the Consumer Prices Index (CPI) data released by the Office for National Statistics (ONS) came in a touch higher than had been anticipated. Core inflation (which excludes more volatile components of the inflation basket, such as energy, food, alcohol and tobacco), also rose by an annual rate of 3.8%, up from 3.7% in the year to June. UK inflation is now at its highest level since January 2024 and close to double the Bank of England’s (BoE) 2% target. Within the print, air fares were singled out as a key contributor to the upward price pressure. Petrol and diesel also increased over the month compared with a decline at the same point last year and food prices also continued to accelerate. While these factors and the timing of the ONS’ annual data collection (which coincided with the start of school summer holidays more pointedly this year than last) played a part in the higher print, many observers were quick to point out bigger picture domestic and geo-political issues at play. Higher government spending, borrowing and taxes, as well as global trade friction, are all notable factors at play too. 

As a result of the higher-than-expected print, market odds of an additional interest rate cut before the end of the year diminished. Messaging from the BoE earlier this month also underscored the Bank’s wariness of cutting rates too soon. Recent consensus had been that one additional rate cut would be implemented in 2025, particularly given the more modest pace of economic growth since the end of the first quarter of the year. This will be unwelcome news for borrowers, particularly those with tracker mortgages - although mortgage rates have been trending downward this year. Expectations for tighter financial conditions will also put further pressure on UK government borrowing costs. Movement in the pricing of the rate outlook over recent weeks has seen long dated 30-year gilt yields rise to their highest level since 1998. The prospect of higher long-term borrowing costs will only add to the dilemmas facing Chancellor Rachel Reeves ahead of the Autumn Budget. However, there was some welcome news for the Chancellor, as the latest Purchasing Managers’ Index (PMI) survey saw UK firms report their strongest growth in a year, with the data suggesting that the UK economy is continuing to outperform those of other major developed market nations. The UK posted the strongest economic growth within the G7 over the first half of 2025. Nevertheless, the latest PMI data should be treated with some caution. Overall growth is still sluggish by historic standards and whilst the services sector remains strong, manufacturing continues to exhibit weakness. Businesses also remain cautious following tax hikes and amidst wider geopolitical uncertainty.

Although the US and the European Union shook on a “framework” trade agreement last month, President Trump had subsequently suggested that pharmaceuticals and semiconductors were not part of the deal. As a result, EU exports to the US within these sectors were left facing potential tariffs of 250% and 100% respectively according to the US President. However, it seems these claims have now been retracted, with details released about the agreement last week confirming pharmaceutical and semiconductor tariffs would be limited to 15% - the same rate being applied to most other sectors under the terms of the deal struck. It remains to be seen whether the agreement between two of the world’s largest trading partners will prove beneficial for both sides. The EU is accepting a 15% levy on exports to the US whilst reducing tariffs on all US industrial goods to zero. Despite the rather chaotic beginnings, the EU and US issued a joint statement in which they committed to working towards restoring “stability” and “predictability” in EU-US trade and investment. The statement also noted that this was a “first step in a process” which could expand and develop further over time.

US equities moved higher and the yield on 10-year treasury bonds moved lower last week after the Chairman of the US Federal Reserve hinted at a September rate cut. At a central bankers’ pow-wow in Jackson Hole, Wyoming, Jerome Powell explicitly said that he doesn’t want the labour market to weaken further. He also acknowledged that US-imposed tariffs could stimulate inflation and induce slower growth – posing a dilemma about when to cut interest rates. The odds of a 0.25% cut in September jumped to almost 100% as Powell spoke. 

EU officials are seeking to speed up plans for the creation of a digital Euro. The move follows the passing of landmark legislation to regulate the US dollar stablecoin market last month. The US bill, dubbed the GENIUS Act, could pave the way for wider everyday use of dollar-pegged stablecoins – a type of cryptocurrency which is designed to maintain a constant value through a peg to traditional real-world assets, such as the US dollar. As a result, EU policymakers have become concerned that stablecoins linked to the dollar could threaten the dominance of the Euro on the continent and undermine European Central Bank (ECB) monetary policy. US Treasury Secretary, Scott Bessent, believes stablecoins will become an important source of demand for short-term bonds, which could be particularly important at a time where markets are increasingly concerned about US debt levels. Legislative delays are understood to have held up the digital euro project, while it is thought the ECB is yet to make key decisions regarding the technologies to be used for its development. 

• Nvidia in focus: Reports suggest the world’s largest listed company is developing a new artificial intelligence (AI) chip for China. This follows last week’s deal with the US government, allowing sales in China in return for a 15% revenue share. Nvidia results due on Wednesday 27 August will be closely watched
• Tech pullback: AI enthusiasm cooled last week, with the tech focused Nasdaq Composite index pulling back. Investors are likely profit taking amid some doubts over the sustainability of massive spending on AI related infrastructure
• UK property tax shake-up: The government is reportedly exploring a radical shake-up of stamp duty and other property taxes ahead of the next budget. The proposals mooted include capital gains tax on primary residence sales and a national property tax on higher value homes
• UK house prices in June rose +3.7% year-on-year from +2.7% in May, according to data from the Office for National Statistics. London saw the lowest annual price growth of +0.8%
• Thailand’s crypto push: Tourists will soon be able to convert cryptocurrency into Thai Baht under a trial scheme aimed at boosting tourism revenues
• Tesco meal deal – a live illustration of inflation: Tesco has raised its meal deal price by 25p – now £3.85 with a Clubcard, £4.25 without. It is the third hike since 2022, before which the offer remained at £3 for a decade
• Walmart strength: Q2 revenue beat estimates, driven by solid growth in grocery and a 25% jump in e-commerce Walmart account for 25% of all grocery dollars spent in the US 

 

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