• The Office for National Statistics will release the UK inflation report on Wednesday.
• Core annual inflation is seen a tad lower at 6.8%, headline figure likely to increase.
• The UK CPI data could offer fresh cues on the BoE’s policy outlook and rock the Pound Sterling.

The United Kingdom’s Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) data on Wednesday. The British inflation report is set to have a significant influence on the Bank of England’s (BoE) path forward on interest rates, eventually impacting the Pound Sterling valuations.

The BoE is expected to follow the footsteps of the European Central Bank (ECB) and signal no more rate hikes this year after delivering a 25 basis points (bps) rate increase on Thursday. Markets are pricing a 75% chance of such a hike. Mounting stagflation risks and cooling labor market conditions could lead the BoE to convey a dovish message.

The United Kingdom’s ILO Unemployment Rate climbed to 4.3% in the quarter through July from the 4.2% seen during the three months to June. The economy saw an employment loss of 207K in July, having shredded 66K jobs in June. The Average Earnings excluding bonuses rose 7.8% 3M YoY in July as expected, but at a joint-record pace.

The August UK inflation report could help markets reprice BoE policy expectations beyond the September meeting.

What to expect in the next UK inflation report?

The headline annual UK Consumer Price Index is set to rise 7.1% in August, compared to a 6.8% growth reported in July. The Core CPI is expected to rise 6.8% YoY in August, slightly down from July’s 6.9% increase. On a monthly basis, Britain’s CPI is seen rebounding to 0.7% in the eighth month of the year, having declined by 0.4% in July.

The surge in Oil prices and an increase in the alcohol tax are likely to contribute to the renewed uptick in headline inflation. “I agree with the MPC that the risks to inflation around the August forecast are to the upside,” BoE Deputy Governor appointee, Sarah Breeden, said last week.

Previewing the event, analysts at BBH noted: “August CPI will be reported Wednesday. Headline is expected at 7.1% y/y vs. 6.8% in July, core is expected at 6.8% y/y vs. 6.9% in July, and CPIH is expected at 6.6% y/y vs. 6.4% in July.  If so, this would be the first acceleration in the headline since February and would move it further above the 2% target.”

“WIRP [World Interest Rate Probability, a gauge by Bloomberg] suggests odds of a 25 bp hike are around 85%. For a time over the summer, a 50 bp hike was largely priced in and so the change is noteworthy. Odds of a second 25 bp hike are around 15% for November 2 and then rise to top out near 55% for February 1. However, the first cut is still not priced in until H2 2024,” the analysts added