Food and fuel unexpectedly pushed UK inflation to 3.6%, traders are firmly betting on the central bank to cut interest rates.

The UK inflation rate unexpectedly rose to the highest level since January 2024 due to a rise in food prices, putting pressure on the Bank of England's continued interest rate cut plans. The latest data from the UK National Statistics Office shows that the Consumer Price Index (CPI) rose from 3.4% in June to 3.6%, exceeding the expectations of economists and the Bank of England, who had predicted the rate to remain unchanged. Following the release of the data, the pound briefly rose 0.2% against the US dollar, reaching $1.3412. Richard Hayes, acting chief economist at the statistics office, pointed out that the rebound in inflation was mainly driven by a narrowing decrease in the price of motor fuels. Compared to the same period last year, fuel prices in June this year only saw a slight decrease, while the decrease in prices during the same period last year was significantly larger, leading to an increase in overall inflation levels. Although the current inflation rate of 3.6% is still well above the central bank's target of 2%, the Bank of England believes that this increase is temporary and expects a reversal by the end of the year. This belief is supported by recent cooling economic activities and a weak labor market trend, which may help alleviate upward pressures on consumer prices. It is worth noting that the service sector inflation rate, a key indicator monitored by the central bank, remained high at 4.7% in June, exceeding market expectations. Additionally, food and non-alcoholic beverage prices, which significantly impact household inflation expectations, rose by 4.5% year-on-year, becoming an important factor driving the CPI increase. These data suggest that while overall inflation is expected to fall, price pressures in core areas have not significantly eased. Facing a complex situation, Bank of England Governor Andrew Bailey recently signaled a policy shift. He stated that since the April increase in wage taxes and minimum wage standards by the Labour government, business labor costs have risen, leading to a noticeable cooling in the job market and an acceleration in job losses. If the labor market continues to deteriorate, the Bank may further cut interest rates by 25 basis points at the Monetary Policy Committee meeting on August 7th and may take further action later this year. Financial markets have already priced in this expectation, with traders believing there is a 90% chance of a rate cut at the next meeting. Following the release of the inflation data, the market is closely monitoring the possibility of a "soft landing" for the UK economy. While the Bank of England emphasizes short-term disruptions, the stickiness of service sector inflation and continued high food prices remain a challenge. The future policy direction will depend on the balance between the speed of cooling in the labor market and the pace of inflation reduction, with the early August interest rate decision becoming a key observation window.