Will price growth in the UK stay flat in August?

Barclays forecasts UK headline inflation to remain unchanged at 3.8% year-over-year for August, with core inflation easing slightly to 3.6% from 3.7%. The bank anticipates food price acceleration to 5.4% and a rise in energy inflation to 2.5% due to base effects, while services inflation is projected to decline to 4.8% and core goods inflation to 1.5%. The U.K. Retail Price Index (RPI) is forecast at 4.57% year-over-year, below July's 5.43% and slightly under current market pricing, with official figures expected September 17.

Analysis

Barclays' latest economic research projects that UK headline inflation for August will remain unchanged at 3.8% year-over-year, indicating persistent price pressures. However, a slight easing is anticipated in core inflation, which is forecast to decline to 3.6% from 3.7% in July. The stability in the headline figure is driven by conflicting sectoral trends: food price inflation is expected to accelerate to 5.4% YoY, and energy inflation is projected to rise to 2.5% from 1.4%, largely due to base effects from last year's lower pump prices. These inflationary pressures are partially offset by disinflation in other areas. Services inflation is forecast to cool to 4.8% from 5.0%, aided by a 1% month-over-month contraction in hotel prices and flat airfares following a 30% surge in July. Core goods inflation is also expected to see a marginal decline to 1.5%. Significantly, the bank's forecast for the Retail Price Index (RPI) is 4.57% YoY, a deceleration from July's 5.43% and slightly below the 4.59% currently priced into the RPI fixings market, suggesting a potential minor dovish surprise relative to market expectations ahead of the official data release on September 17.

Key Decisions for Investors

• Given the divergence between sticky headline inflation and easing core figures, investors should monitor for signals on how the Bank of England will weigh persistent food and energy costs against disinflation in services and goods.
• Traders in UK inflation-linked bonds and swaps should note that Barclays' RPI forecast of 4.57% is marginally below the market's priced-in expectation of 4.59%, presenting a potential opportunity to position for a slight downside surprise in the official data.
• The ongoing disinflation in core goods and services, contrasted with accelerating food inflation, suggests a nuanced sector strategy; consider potential headwinds for discretionary consumer sectors while evaluating the pricing power of consumer staples and food retailers.