Gasoline prices falling become a key driver! UK June inflation rate unexpectedly drops to a new low in a year, and the Bank of England next week to stand still again receives support.

Driven by the fall in gasoline prices, the UK inflation rate unexpectedly dropped to its lowest level in over a year. Data released by the UK Office for National Statistics on Wednesday showed that the UK's Consumer Price Index (CPI) rose by 2.6% year-on-year in June, the lowest level since March last year. This was lower than the 2.8% year-on-year increase in May, and also lower than the average economist expectation of 2.7%. The cooling of tensions between the US and Iran in June led to a decrease in international oil prices, pushing down gasoline and diesel prices. Data released by the UK government weekly showed that the UK retail price of gasoline has fallen to around 152 pence per liter, a decrease of about 4% from the peak at the end of May. Food and non-alcoholic beverage prices also contributed to the downward pressure on inflation. Meanwhile, the services inflation rate, which the Bank of England pays close attention to as a reflection of domestic inflationary pressures, slowed down from 3.7% to 3.6% in June, slightly higher than market expectations. The cost of living is one of the top priorities for the new UK Labour government. The new Prime Minister, Burnham, has promised to provide more "breathing space" for UK households. As one of his first policies as Prime Minister, he announced the removal of Value Added Tax (VAT) from residential electricity bills starting in October. The UK government estimates that this measure will reduce the overall inflation rate by about 0.1 percentage points. However, the relief that consumers have gained from the fall in inflation may only be temporary. Economists predict that with the energy price cap for UK households set to increase by 13% in July, the inflation rate in July may rise again. As the tensions between the US and Iran escalate again, international oil prices have risen above $90 per barrel, and natural gas prices have also increased significantly in recent weeks, which could offset some of the effects of the cost-of-living support measures introduced by the Burnham government. Currently, the inflation level in the UK remains significantly lower than the level that the Bank of England was concerned about at the beginning of the Middle East conflict. In addition, the employment market data released on Tuesday provided the Bank of England with a basis to maintain its monetary policy at the upcoming meeting next week. The UK Office for National Statistics stated on Tuesday that the number of payroll employees decreased by 4,000 in June, compared to an increase of 3,000 in May, which was better than economists' expectations of a decrease of 8,000. In the three months to June, the number of job vacancies in the UK was 712,000, roughly unchanged from the previous period. The unemployment rate for the three months to May remained at 4.9%, although the UK Office for National Statistics warned that the quality of the data estimating this unemployment rate had declined due to a temporary issue; the youth unemployment rate for those aged 16 to 24 rose slightly to 16.4%, the highest level since 2014. Private sector wage growth has fallen to its lowest level since 2020. The UK Office for National Statistics reported that in the three months to May, wage growth excluding bonuses remained at 3.4% year-on-year. The private sector wage growth, which the Bank of England pays particular attention to, grew by 2.9% year-on-year in the three months to May, the lowest rate since October 2020. These data suggest that the downward trend in the UK labor market may be nearing its bottom. Senior economist at Moody's Analytics, Andrew Hunter, stated, "It appears that the UK labor market is gradually stabilizing after a period of prolonged weakness. This indicates that the labor market has weathered recent energy shocks, and the Drag on Employment from Increases in the National Minimum Wage and Higher National Insurance Contributions is finally beginning to recede." The signs of stabilization in the UK labor market are expected to support the Bank of England's decision to maintain its current stance next week. The state of the labor market is crucial for the Bank of England policymakers. Bank of England officials hope that weak labor demand will be able to limit the second-round inflationary effects caused by soaring energy prices. The Bank of England will announce its interest rate decision on July 30th. The market generally expects the Bank of England to keep interest rates unchanged at the monetary policy meeting next week, seeking a balance between the risks of rising energy prices, weak labor market, and lackluster economic growth. The Bank of England will also publish its latest set of comprehensive economic forecasts at that time. However, due to the escalation of tensions between the US and Iran, investors still expect the Bank of England to take one rate hike action before the end of the year.