23 July 2026: CPI resilience complicates the Bank of England rate path

UK inflation slowed to its lowest level in more than a year in June, helped by cheaper fuel, food and clothing, offering temporary relief to households before higher energy costs are expected to push prices up again.

Consumer prices rose 2.6% in the 12 months to June, down from 2.8% in May and the lowest annual rate since March 2025, the Office for National Statistics said on Wednesday. The reading was below economists' median forecast of 2.7% and marked the third straight month inflation undershot expectations.

Petrol and diesel prices fell 3.1% during the month after crude oil declined amid hopes of de-escalation in the US-Iran conflict. Food inflation eased to its lowest level since 2024, while heavy discounts on clothing also helped moderate price pressures. Services inflation, a key gauge of domestic price pressures closely watched by the Bank of England, slowed to 3.6% from 3.7%, although it remained slightly above forecasts.

However, economists expect inflation to edge higher in July after Britain's household energy price cap rose by 13%. Renewed hostilities between the US and Iran have also pushed crude oil back above $90 a barrel, while gas prices have climbed sharply in recent weeks as Eurozone states begin to “stock up” for winter.

Containing living costs remains a priority for the Labour government. Prime Minister Andy Burnham has pledged to give families "breathing space" and announced that value-added tax on household electricity bills will be scrapped from October, a move the government estimates will lower inflation by about 0.1%.

Prime Minister Andy Burnham continues to “drip feed” a degree of "Mancherism" into the economy. Yesterday he announced that bus fares in England would be capped at £2.00 per single journey, mirroring a successful policy he adopted in his previous role.

The persistence of core inflation in the United Kingdom is complicating the Bank of England’s monetary policy path, according to a new Nomura analysis. As of early 2026, data suggests underlying price pressures remain stickier than anticipated, challenging expectations of a swift easing cycle.

Nomura’s research indicates that UK core CPI, which excludes volatile items such as food and energy, is proving more resilient than headline figures might suggest. This resilience is attributed to sustained services inflation and wage pressures that are slow to recede. The analysis points to a scenario in which the BoE may need to maintain a restrictive stance longer than markets currently price in, delaying rate cuts into the latter half of 2026 or beyond.

The stickiness of core inflation poses a significant challenge for Andrew Bailey and his colleagues on the BoE’s Monetary Policy Committee (MPC). While headline inflation has fallen from its peaks, the underlying data complicates the narrative of a return to the 2% target.

Nomura’s view suggests that the MPC will proceed with caution, likely pausing any rate cuts until there is clearer evidence that domestic price pressures are sustainably easing. This could lead to a divergence between market expectations for rapid easing and the BoE’s more measured approach.

For investors and businesses, this analysis underscores the importance of monitoring core CPI and services inflation as key indicators. A prolonged period of high rates could further dampen economic growth, but premature easing risks reigniting inflation. The pound and UK gilt yields may see increased volatility as markets adjust their expectations to align with a potentially slower rate-cutting cycle. Consumers may continue to face elevated borrowing costs, affecting mortgages and business loans.

The pound weakened yesterday, driven by softer UK inflation data, cautious sentiment about the new government’s fiscal plans, which remain largely unassessed by the market, and broad US-dollar strength. Across major pairs, GBP underperformed its G10 peers and closed the session near the lower end of its recent trading range.

Federal Reserve chairman Kevin Warsh, still easing his way into his new role, testified before Congress over two days last week, totalling more than five hours in the hot seat. Yet it was comments from several of his colleagues that gave the clearest picture of what the Central Bank is likely to do at next week's policy meeting.

Warsh is determined to get out of the business of giving markets and the public much guidance on future policy, which means the markets fill in the gaps based on comments from other officials. That isn't necessarily a bad thing; it preserves flexibility in interest rate policy that was diminished when former Fed chiefs all but preannounced upcoming rate moves. But it also means that Warsh has ceded some of the power to set expectations, which raises the risk of more surprise and volatility around future actions.

The FOMC meets next week, and Warsh has declined to offer much in the way of guidance on what it will do as the blackout on comment approaches, instead promising a "family fight" to arrive at the best decision.

Other officials were a little more specific. For example, Fed Governor Christopher Waller, speaking on July 13, said that incoming June inflation data could tilt him towards favouring a near-term rate hike. That inflation data was soft, implying that he will be more patient.

Meanwhile, Lisa Cook, speaking two days later, said, "If we do not see signs of disinflation soon, I am prepared to act," suggesting that she is happy to leave rates steady for now, but is on alert for favouring rate hikes.

Most notably, vice chair Philip Jefferson said last Thursday that "in a scenario where actual inflation does not start to cool down soon, I believe that it could be appropriate to reconsider our current policy stance to ensure we fulfil our commitment to deliver price stability."

The 2026 FIFA World Cup has given the US economy a $20 billion boost, according to Bank of America, sparking major local booms in host cities and helping propel the strongest surge in consumer spending in more than four years.

Bank of America CEO Brian Moynihan said half of the tournament’s $40 billion in fresh economic activity has been funnelled into the US, and that the footprint extends far beyond the turnstiles. The bank’s 70 million consumer customers, who spend more than $400 billion a month, are spending 5% to 6% more than a year ago.

“Even when we look at host cities like Kansas City, we can see the growth rate in spending is faster than in other cities,” Moynihan said. “So it’s having this on-the-ground economic impact, and that spending is going into what we call bricks-and-mortar, going to bars and restaurants, not necessarily just the people in the stadium.”

The US dollar was broadly firm yesterday, supported by safe-haven demand, higher US yields, and geopolitical tension, even though the index finished the session slightly lower overall. The dollar outperformed most major currencies, particularly the yen, and held on to its recent multi-week strength.

The Governing Council of the ECB will meet later today to decide the path of official interest rates before most of its members head off on annual leave.

The latest flare-up in fighting between the U.S. and Iran probably won’t be enough to force the European Central Bank’s hand, even as energy costs creep higher.

Investors expect the ECB to keep interest rates unchanged at 2.25%. Policymakers raised borrowing costs by a quarter of a point in June, deciding it was time to start trying to curb inflation.

Eurozone inflation cooled to 2.8% last month from 3.2% in May, weakening the case for continued rate hikes.

However, there is still a case for the ECB to be proactive.

The U.S. has launched attacks on Iran for 11 straight days, disrupting shipping through the Strait of Hormuz and sending oil prices to their highest level in more than a month.

Investors are worried that the breakdown of the cease-fire between the two countries will prompt central banks to tighten, which has weighed on U.S.-listed tech stocks in recent trading sessions.

Eurozone banks tightened access to credit in the second quarter amid fears of geopolitical instability, and they expect further tightening in the current quarter, according to the European Central Bank's quarterly Bank Lending Survey published this week.

The survey, a key input in policy deliberations, also indicates that although business loan demand increased, lenders rejected a larger share of applications, and credit standards tightened most in sectors such as the car industry and energy-intensive manufacturing.

The survey results are largely consistent with the ECB's long-held view that the Iran war will be a small drag on economic growth, as the 21-nation euro zone is a large energy exporter and any surge in oil prices weighs on consumption and dents manufacturing profits.

"Perceived risks to the economic outlook and banks' lower risk tolerance remained the main factors contributing to the tightening, as banks remain highly attentive to risks related to geopolitical and energy developments," the ECB said.

Cyprus, one of the Eurozone’s smaller economies, is still performing well in 2026, resilient, growing above the EU average, and supported by strong fundamentals, but facing clear headwinds from Middle East tensions, higher energy prices, and softer tourism.

The latest data from the European Commission, Cyprus’s Ministry of Finance, and the IMF all point to a similar picture: solid growth, strong fiscal position, but rising inflation and weakening sentiment.

However, Cyprus is ‘punching above its weight in the area of card payments: Cards made up 75% of all non-cash transactions in Cyprus during the second half of 2025, the highest share recorded anywhere in the eurozone, according to a report by the Central Bank of Cyprus. Credit transfers followed with a 16% share.

A report, titled “Payment Statistics for the second half of 2025” and published yesterday, recorded a further shift towards digital payment methods, with non-cash transactions rising in both number and total value.

Cypriots made almost five times as many card payments as credit transfers, which remained the second most frequently used payment method. Across the eurozone as a whole, cards accounted for 57% of non-cash transactions, with credit transfers holding a 21% share.

The Cypriot Central Bank has linked the rising use of cards to their convenience, speed and simplicity, alongside the spread of contactless payments, growing e-commerce, and wider acceptance of cards by businesses.

The Euro was slightly weaker yesterday, drifting lower against the US dollar and losing ground against several major currencies as markets positioned ahead of today’s ECB meeting and reacted to broad USD strength.

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