UK CPI Hits 2.9% as Energy Prices and Labour Market Data Weigh on Inflation Outlook

The UK's Consumer Price Index (CPI) for July was in line with expectations at 2.9% year-over-year, but underlying inflation trends suggest a decline to 2.0% by H2 2027.

The near-term inflation trajectory is highly dependent on energy prices, which are influenced by the situation in the Straits of Hormuz. While there's a 60% probability of another ceasefire and deal, this would bring energy prices down in Q4, benefiting underlying inflation into 2027.

Weak labour market data, including a decline in HMRC payrolled employees and an increase in unemployment rate to 4.9%, suggests wage growth will slow further into 2027. This is consistent with the Bank of England's 2% inflation target, supporting the prediction of CPI down to 2.0% by H2 2027.