UK markets advanced further this week, with the FTSE 100 Index gaining 1.64% to trade at 9,310 points at the time of writing.
UK consumer price inflation accelerated more than expected to 3.8% in July, driven by higher food prices and airfares, deepening doubts over whether the Bank of England will cut interest rates again this year to support lacklustre growth. The figure from the Office for National Statistics was the highest since January 2024, up from 3.6% in June, and above the 3.7% forecast by economists polled by Reuters.
July’s gains were fuelled by transport costs, including a sharp rise in air fares, as well as higher motor fuel prices. Food and non-alcoholic beverage prices rose 4.9% year-on-year, the fourth consecutive increase. Services inflation, which is a key measure for the Bank of England’s rate-setters, climbed from 4.7% in June to 5% in July, surpassing the central bank’s forecast.
The Bank of England is contending with a resurgence in inflation alongside sluggish economic growth. It raised its inflation forecasts this month, even as it cut its key interest rate by 0.25 percentage points to 4%.
The higher-than-expected inflation figure significantly reduces the prospect of a further rate cut at the Monetary Policy Committee’s September meeting. According to levels implied by the swaps market, traders now see a roughly 50% chance of another 0.25% cut this year. The figures are also a setback for Chancellor Rachel Reeves as she attempts to boost growth and prepares for a tough Autumn Budget. Economists say the government will likely need to raise taxes further to plug a fiscal hole that some estimate may exceed £20 billion.
The gap between UK and Eurozone inflation is now 1.8 percentage points, with Eurozone inflation steady at 2.0% in July – the widest gap since September 2023. Wage growth is proving stickier in the UK than in the euro area, with Reeves’ increases in employer national insurance contributions and a boost to the living wage contributing to more persistent price pressures.
On a more positive note, the UK government borrowed a lower-than-expected £1.1 billion in July, helped by higher tax receipts. The shortfall between government revenue and spending was below the £2.1 billion gap forecast by the Office for Budget Responsibility, the UK’s fiscal watchdog. Borrowing in July was helped by a £2.7 billion rise in self-assessed income tax receipts, as well as lower-than-expected debt interest costs.
Commodity market
In commodity markets, Brent crude futures traded around $67 per barrel on Friday and are set to end the week slightly higher amid signs of strong demand in the United States and uncertainty over efforts to end the war in Ukraine.
Investors are pricing in more risk as hopes that US President Donald Trump can quickly broker a deal to end the war fade – a reversal of the optimism that propelled a sell-off in oil over the last two weeks.
Russia said on Wednesday that attempts to resolve security issues relating to Ukraine without Moscow’s participation were a “road to nowhere”. Russian President Vladimir Putin demanded that Ukraine give up all of the eastern Donbas region, renounce NATO ambitions and keep Western troops out of the country, sources told Reuters.
Donald Trump has also announced an additional tariff of 25% on Indian goods, effective from August 27, due to India’s Russian crude purchases, which account for nearly 35% of its overall oil imports. Russian embassy officials in New Delhi said on Wednesday that Moscow expects to continue supplying oil to India despite warnings from the United States.
Meanwhile, US crude inventories fell by 6 million barrels last week to 420.7 million barrels, the Energy Information Administration said on Wednesday – well above the 1.8 million-barrel draw expected in a Reuters poll.
Gold prices hovered around $3,330 an ounce on Friday and are set to end the week slightly lower, as the stronger Dollar made gold less attractive to overseas buyers.
Equity markets
US equity futures rose on Friday as investors awaited Federal Reserve Chair Jerome Powell’s remarks at Jackson Hole for signals on the path of interest rates. In Thursday’s regular session, the Dow Jones Industrial Average fell 0.34%, the S&P 500 dropped 0.40%, and the Nasdaq Composite declined 0.34%.
US business activity picked up in August, led by a resurgent manufacturing sector that saw the strongest growth in orders in 18 months. The S&P Global Flash US Composite Purchasing Managers’ Output Index, which tracks the manufacturing and services sectors, rose to 55.4 this month, the highest level since December, from 55.1 in July. A reading above 50 indicates expansion in the private sector.
A strong flash PMI reading for August adds to signs that US businesses have enjoyed a robust third quarter so far. The improvement came largely from manufacturing, where the flash PMI surged to 53.3 – the highest since May 2022 – from 49.8 in July, defying economists’ expectations for a second consecutive month of contraction. Manufacturing was boosted by new orders, which were at their highest since February 2024.
The services sector, meanwhile, eased back to 55.4 from 55.7 in July. Economists polled by Reuters had forecast the services PMI slipping to 54.2. The survey’s measure of prices paid by businesses for inputs edged up to a three-month high of 62.3, from 61.3 in July, with both the services and manufacturing sectors reporting higher costs. Companies cited Donald Trump’s tariffs as the key driver of these increases.
Elsewhere, initial jobless claims in the US rose by 11,000 from the previous week to 235,000 in the second week of August, well above market expectations of 225,000, adding to signs of a cooling labour market.
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