29 July 2026: UK public inflation expectations eased in July

The British public's expectations for future inflation continued to fall in July, according to a survey by the US bank Citi and pollsters YouGov. This could help ease worries at the Bank of England about price pressures in the economy.

Expectations for inflation over the next five years, closely watched by the Bank, fell to 3.7% in July from 3.9% in June, the survey released yesterday showed.

Year-ahead expectations, which tend to be influenced by moves in short-term inflation and energy prices, decreased to 3.4% from 3.8%.

The Bank's policymakers routinely monitor inflation expectations for signs that price pressures could become embedded among consumers as well as businesses.

The surge in energy costs triggered by the Iran war prompted the Central Bank to pause its run of interest rate increases earlier this year.

"Like with energy prices, there remains a risk that a delayed increase in pump prices could trigger a small increase in expectations," Callum McLaren-Stewart, an economist at Citi, said.

"But given pump prices react quickly to crude prices and the scale of the increase in July was well below what we saw in Q2, we think it is unlikely to have a meaningful impact." Consumers have recently observed that pump prices react more quickly to an increase in the oil price than to a fall.

A separate survey of firms published last week showed they were planning smaller price and wage rises this year.

The Bank of England has not said it will raise rates this year only if energy prices stay high. It has said that larger or persistent energy-price shocks increase the risk of second-round inflation, and if those risks materialise, policy may need to “lean against” them. But rate hikes are not tied exclusively to energy prices.

However, the public perception is that, while several factors drive inflation, the oil price is currently the most obvious.

The Bank’s Chief Economist, Huw Pill, who has recently become the Bank's most serious Hawk, believes that underlying inflation remains too persistent, closer to 2.5% than the 2% target, and that policymakers risk becoming complacent if they assume the job is done.

The Bank of England should hold interest rates tomorrow, City AM’s Shadow Monetary Policy Committee has said, after a string of economic data prints showed the threat of spiralling inflation had eased.

It has become popular with media outlets to compile ‘shadow’ MPCs to provide perspective on market expectations.

One Shadow MPC, a group of economists compiled by City AM, said a series of economic data releases had suggested rate-setters have more breathing room on inflation and that interest rates should be left at 3.75 percent.

Economists take part in the Shadow MPC independently of their organisations.

Analysts across City banks and investment companies have broadly agreed that UK monetary policy depends on the flow of oil and gas out of the Gulf region and on whether workers respond to a spike in prices by bargaining for higher wages, an inflationary risk referred to as “second-round effects”.

The Brent Crude oil price has dropped to around $80 per barrel this week as hostilities between the US and Iran cooled, having briefly hit $100 last week when an Iran-backed militia attacked Saudi Arabian ships.

Sterling weakened slightly yesterday, with GBP/USD slipping from Monday’s highs and closing almost flat at 1.3289, while EUR/GBP held around 0.8555. The move reflected a mild risk-off tone ahead of the Federal Reserve meeting and stronger USD demand.

Companies are achieving more output per person-hour of labour because they are making better use of existing capital, a provocative new analysis finds, not, at the moment at least, by making major use of AI.

AI advances may be generating substantial micro-level gains in some sectors, but so far they are not the driver of one of the most important macro trends of the last couple of years.

A surge in productivity after a couple of decades of subpar growth has been one of the best pieces of news about the U.S. economy in the last few years.

Over the last year, output per hour worked is up 2.5%, compared with 1.6% annually over the last 20 years.

That may sound like a small change, but if sustained over just a few years, that higher productivity would compound, making incomes and output per worker much higher.

While labour productivity is up, total factor productivity, not just output per hour of work but output per hour of work and unit of capital, is little changed.

Looking across industries, sectors with high AI adoption do have higher productivity growth, but that trend predates the pandemic, before high-quality large language models became more popular. Higher output is coming from greater use of existing capital.

However, the increased use of AI generally means jobs will change far more than they disappear. The labour market will split: high‑skill roles will expand, mid‑skill routine work will shrink, and low‑skill service jobs will remain.

The FOMC meets today, with markets expecting a hold, but the real story is the tone of Kevin Warsh’s delivery. Rates are widely expected to remain at 3.50–3.75%, but oil-driven inflation risks, Warsh’s hawkish bias, and his refusal to provide forward guidance mean this meeting carries unusually high surprise potential.

This meeting is unusually hard to predict for several reasons: June inflation cooled to 3.5% YoY, below expectations. Job creation slowed sharply (only 57k added), but oil prices jumped again amid Middle East tensions, a major upside risk. This creates a classic “hold now, hike later” dilemma.

Meanwhile, Warsh’s communication style is causing concern, if not confusion. He has abandoned forward guidance, issuing extremely brief statements with minimal detail. Markets therefore have less visibility and price in greater uncertainty.

Division remains within the committee; at least two hawkish members (Hammack and Logan) may dissent and vote for an immediate hike.

Texas is the largest U.S. state by area, if not by population, yet its Federal Reserve data have, until now, largely been ignored.

However, given Warsh’s continued reticence, market analysts are paying closer attention to developments across the country, stitching together individual Fed surveys as a proxy for the wider economy.

Texas manufacturing output growth accelerated in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose six points to 10.1.

Other measures of manufacturing activity also showed solid growth. The capacity utilisation index and the shipments index were largely unchanged at 5.9 and 8.8, respectively. The new orders index rose to 6.4 from 2.3.

Perceptions of broader business conditions improved in July. While the general business activity index was little changed at 1.3, the company outlook index jumped 11 points to 13.4, signalling a notable improvement in outlooks. The outlook uncertainty index fell five points to 6.4.

Employment growth and work hours were relatively stable in July. The employment index dipped two points to 12.2, remaining above its series average. The hours worked index edged down to 4.3 from 5.9.

Price and wage pressures remained markedly elevated, though the indexes showed mixed movements in July. The finished goods prices index fell three points to 25.6. The raw materials prices index was largely unchanged at 41.3. The wages and benefits index ticked up five points to 30.8.

The US dollar softened slightly yesterday, easing from recent one-month highs as traders reduced exposure ahead of today’s FOMC decision. The pullback was modest, as the dollar remained firm overall, but the tone shifted towards caution.

Germany's economy probably saw modest expansion in the second quarter, with growth likely to continue into the third, according to the Bundesbank.

Output is likely to have “increased slightly” between April and June, the Central Bank reported yesterday.

That's better than its previous prediction of stagnation, though growth in the three months through September is set to be weaker.

A first estimate of second-quarter GDP is due tomorrow, with a Bloomberg poll of analysts pointing to a flatline, similar slowdown to the previous period.

“Overall, the current set of indicators points to a slightly higher underlying economic growth rate than anticipated” in June's projection, the Bundesbank said in its monthly report.

The forecast underscores the resilience of Europe's largest economy to the Middle East conflict and its fallout on energy prices, even as activity is easing compared with the surprisingly strong start to the year.

Both the Bundesbank and the government forecast growth of just 0. 0.5% for the full 12 months, a blow to Chancellor Friedrich Merz, who predicted 2026 would be a “year of considerable growth” following a lengthy malaise.

There have been positive signs of late. A key index of business expectations rose more than expected in July, while separate surveys suggested private- sector activity is growing again.

The Bundesbank said manufacturers are benefiting from strong foreign demand and rising exports, while consumers are “relatively unfazed” by high energy costs. Major government outlays on infrastructure and defence, meanwhile, are supporting activity.

Merz’s coalition has also announced reforms to pensions, income tax and bureaucracy. A separate Bundesbank study published yesterday found that red tape costs German firms about 7% of revenue a year, up from 5% between 2022 and 2024. That's caused productivity growth to weaken by approximately half a percentage point.

Turning to inflation, the Bundesbank said a slight acceleration beyond the current level of 2. 2.4% is expected in the coming months.

Europe has embarked on a quest for financial sovereignty. It aims to reduce its dependence on US-controlled financial infrastructure, non-European payment systems, and foreign capital markets, while building its own safe assets, integrated markets, and a digital euro.

It’s about strategic autonomy, ensuring Europe can finance, regulate, and defend its economic interests without relying on Washington or Beijing.

Across ECB members’ speeches and policy papers, the message is clear: Europe wants the ability to control its own money, payments, and financial system without external leverage. The ECB warns that Europe’s dependencies in payments and finance have become “excessive” and threaten its ability to control its economic destiny.

In several speeches, ECB members and National Central Bank Governors have emphasised that Europe’s monetary sovereignty is constrained by fragmentation, reliance on US infrastructure, and insufficient fiscal integration.

Analysts argue that digital transformation and geopolitical rivalry make sovereignty more urgent, especially as the US and China weaponise financial networks and payment systems.

In short: If Europe cannot control its money and financial plumbing, it cannot control its economy.

This is a matter for the European Commission and the European Parliament, but both bodies have abrogated responsibility to the Central Bank, which is ill-equipped for such decision-making.

The Euro strengthened slightly yesterday, recording a small gain against the US dollar and edging higher against the British pound. The move was modest, but it marked a pause in the euro’s recent decline as markets positioned ahead of today’s FOMC meeting.

Have a great day!