27 July 2026: UK companies see cost pressures spreading at record pace

Retail sales rose unexpectedly in June as shoppers increased spending on air conditioning and clothing, official data showed, adding to signs of an economic pickup spurred by warm weather and the World Cup.

Sales volumes rose 1.0% year-on-year, the Office for National Statistics reported, reversing economists' forecasts for a 0.3% fall in a Reuters poll.

Sales rose 1.2% month-on-month in May, while April's sharp 1% drop was revised to a slightly better fall of 0.7%.

The ONS said the share of internet sales rose to its highest since April 2021 at 29.4% in the three months to June, as the heatwave discouraged shoppers from visiting high streets.

Sales for retailers who do not have a ‘bricks and mortar’ store, including online retailers and market stalls, jumped 4.4% month-on-month as households tried to stay cool with purchases of fans in one of the hottest Junes on record.

The data chimed with a GfK survey of improved sentiment among consumers, helped by optimism about the arrival of Britain's new Prime Minister, Andy Burnham, despite concerns about the war in Iran.

As Burnham took office, he made easing the cost of living for households his top priority. His spokesman announced the removal of VAT on electricity bills and a lower cap for bus fares. Small beer in the grand scheme of things, but reports show that voters are viewing his approach positively.

Inflation fell in June, as petrol and food prices fell during the brief ceasefire in the Gulf conflict, while the downturn in the jobs market has shown signs of stabilising.

June's increase in retail sales volumes suggests that consumers kept spending despite the rise in energy prices since the war in Iran began.

But with the drag on households' real incomes set to intensify, so don't expect this resilience to last.

Inflation indicators from British companies are flashing red in two long-running business surveys also published last week, which showed record increases in price gauges, suggesting the impact of the Iran war is spreading across the economy.

S&P Global's preliminary UK Composite Purchasing Manager’s Index for April, covering services and manufacturing companies, showed the biggest month-on-month rise in its input prices index since records began in 1998, hitting its highest level since a period of double-digit inflation in late 2022.

A separate indicator of price expectations solely among manufacturers, published by the Confederation of British Industry, showed the biggest month-on-month increase since records began in 1975, jumping to the highest level in over three years.

Government borrowing costs hit their highest ⁠level so far in April shortly after the PMI was published. It will add to the Bank of England's concerns that a leap in energy prices could be about to ignite broader inflationary pressure.

Investors are now fully pricing in two rate hikes this year with the possibility of a third, doubling ​their bets from earlier in the week.

Sterling ended last week stronger overall, with gains against the Euro and a mixed but broadly firm performance against the dollar. The pound benefited from easing UK political risk, softer U.S. data, and solid UK retail sales and PMI figures, together with additional bets on a rate hike this year.

Market expectations of a hike at this week’s FOMC meeting have risen somewhat as Kevin Warsh prepares for his second meeting as chairman. It has not taken investors long to temper their hopes for anything beyond cursory guidance from Warsh, with most expecting him to announce the outcome of the vote and leave them to make up their own minds about the reasons for the Fed’s actions.

Despite Donald Trump’s calls for lower rates, he has allowed Warsh some time to settle into his new role before he is badgered about rate cuts. Inflation remains above the Fed’s 2% target.

While the recent surge in oil prices has led markets to increase their expectations of a Federal Reserve rate hike, June’s inflation data came in well below forecasts, and labour market figures were softer than anticipated. As a result, expect the Fed to leave policy unchanged at its meeting this week.

The June meeting dispelled any fears of a potential politicisation of the Federal Reserve following Kevin Warsh’s appointment as its new Chair.

The FOMC statement and Warsh’s own commentary emphasised a commitment to price stability. The summary of economic projections, meanwhile, showed the FOMC split down the middle on whether to raise interest rates this year.

There is justifiable concern that the re-escalation of the Middle East conflict and the rebound in oil prices will keep inflation higher for longer.

Over the past seven days, the spike in oil prices pushed expectations of a rate hike by the first quarter of 2027 up by 20bp. However, petrol prices didn’t fall in line with oil price declines. The oil price fell below $70 a barrel for only a brief period. Ordinarily, this would be consistent with prices dropping by $3.50 per gallon, yet they got nowhere near that.

Multiple major institutions are now reinforcing warnings of an economic crash, and the tone has shifted from theoretical risk to heightened probability. The warnings aren’t about a single trigger but a cluster of global shocks that could interact: Middle East conflict, volatile oil prices, fragile public finances, and AI-driven market leverage.

The World Bank’s chief economist has warned that an escalation in the Middle East war could halve global growth to 1.3% this year, driven by surging inflation, rising interest rates, disrupted oil and fertiliser shipments, and debt distress in vulnerable economies.

This is one of the strongest alerts issued by the institution in years.

Apart from the FOMC meeting, a wealth of economic data is due for release this week, starting today with June producer prices, which are expected to show a 1.6% increase after May’s 4.55 fall. This data is often volatile due to its inclusion of ‘big ticket’ items such as planes and ships.

That will be followed by the Case/Shiller house price index and consumer confidence tomorrow, PCE inflation on Thursday, and Chicago and Michigan activity reports on Friday.

The US dollar strengthened last week, with the Dollar Index rising steadily and finishing the week up about 0.7%. Higher US yields, hawkish Fed expectations, and risk-off flows drove the move.

Christine Lagarde effectively teed up a September rate hike, not by announcing it, but by making the conditions for one unmistakably clear. Her message was consistent: the ECB is on alert, the energy shock isn’t over, and September is the tipping point.

Lagarde’s press conference last week made three things abundantly clear: some ECB governors wanted to hike immediately; she confirmed that several members argued for raising all three policy rates at the July meeting; and energy prices have reset the inflation outlook.

Oil is back above $100 per barrel, and gas at three-year highs has erased hopes of a quick disinflation. She said the full effects of the energy shock have yet to play out.

September is the real decision point; the ECB will receive several inflation releases, Q2 GDP, wage-compensation data, consumer expectations, and PMI surveys before the next meeting, providing a full dataset to justify a move.

Lagarde commented, “The burden of proof is on data.”

Put simply: The ECB didn’t hike now because she wants more data, but she made clear that the bar for hiking in September is not very high.

As one of those hawks who voted for a hawk last week, ECB Chief Economist Philip Lane took to the airwaves on Friday to explain his reasoning without confirming how he voted.

The European Central Bank still considers the current inflation shock to be medium-sized, requiring some policy action but not aggressive moves, and it will bring price growth back to 2% in the next year or so, Lane said.

The ECB has offered plenty of hints that more policy tightening will be needed. Economists and traders are overwhelmingly betting on a rate hike at the next meeting in September.

“What we’re saying is that we will make sure that we guide inflation from where it is now, 3%, back to 2%, over let’s say the next year or so,” Lane said in Donegal on Friday.

While Lane did not discuss what measures may be coming in September, he said the ECB would be closely watching whether surging energy costs generate second-round price or wage impacts, which could threaten to perpetuate inflation.

The ECB has not seen such effects so far, but Lane argued that the longer energy prices stay high, the more likely it is for second-round effects to become evident.

He nevertheless argued that the current inflation overshoot is still a moderate shock, which requires a measured response from the Central Bank.

“It’s not for now the kind of red alert level where you must move quickly as we did in 2022; it’s a medium-sized shock, and we’re looking at every meeting to see exactly what is the right level of interest rates to make sure it remains medium-sized and doesn’t persist, doesn’t become red,” Lane said.

Despite sticky inflation, July is seeing a welcome revival of economic activity in the Eurozone, alongside a marginal cooling of inflationary pressures, according to provisional PMI survey data from S&P Global. However, a volatile geopolitical environment means it remains to be seen whether the good news can last.

The headline S&P Global Flash Eurozone Composite PMI Output Index posted 51.9 in July, up from 50.0 in June. The improvement indicates that, after a largely stagnant second quarter, business activity has bounced in July. This takes the PMI to a level indicative of GDP growing at a reasonably solid 0.3% quarterly pace.

The Euro weakened last week, losing ground against both the pound and the dollar. The data shows a clear pattern: EUR drifted lower, pressured by stronger UK data, softer Eurozone momentum, and a firm US dollar.

Have a great day!