"Currently markets are only pricing in a 35% chance of a cut in August, while prior to this inflation print that number stood at around 50%."
- Nathaniel Casey, investment strategist at Evelyn Partners
UK CPI inflation held steady at 2.0% in June - slightly higher than economists' forecasts of 1.9%.
Core CPI inflation (excluding energy, food, alcohol and tobacco) was also unmoved at 3.5% compared to May.
While CPI inflation held at the Bank of England's 2% target, industry experts have noted that 'particularly sticky' services inflation, which stayed at 5.7%, alongside elevated core inflation, could cause the Bank's Monetary Policy Committee to hold off on a base rate reduction at next month's meeting.
Nathaniel Casey, investment strategist at Evelyn Partners, commented: "Despite headline inflation remaining in line with the Bank of England’s inflation target for a second consecutive month, June’s inflation data came in slightly warmer than forecasters had been expected, with a particularly sticky reading for services inflation which stayed at 5.7%.
"Even as headline inflation remains within target for its second consecutive month, the continued strength in services inflation will likely remain a cause for concern for committee members at the BoE, heading into their next meeting which concludes with an MPC rate decision on 1 August.
"However, it remains to be seen if this will be alarming enough to delay their first rate cut later into the year. Currently markets are only pricing in a 35% chance of a cut in August, while prior to this inflation print that number stood at around 50%."
Derrick Dunne, CEO of YOU Asset Management, said: “It’s clearly a positive to see inflation hit the bullseye again, but there are a couple areas which policymakers will find give cause for concern. Core inflation is still higher than the headline rate, stubbornly so, while services inflation is not budging either.
“The trouble with these measures is they are more embedded areas of price shifts in the economy which can reinvigorate the headline rate were they to stay higher for a longer period of time.
“With the economy growing at a strong clip, the Bank of England is likely going to remain cautious when rate setting. The risk of rebounding inflation associated with taking the pressure off rates too soon will be contributing to the MPC’s caution.
“In all likelihood rates will come down, even if the labour market continues to show signs of strength tomorrow. It just might be a slower path than was expected at the beginning of the year. The Bank will have in mind that households with mortgages are under pressure, so will want to balance that as much as possible."
Tom Stevenson, investment director at Fidelity International, added: “A second consecutive month of headline inflation at target makes a cut in interest rates on 1 August more likely but not yet a shoo-in. The key questions for the Bank of England rate setters remain persistently high service sector inflation and wage growth.
“It is a sign of how far we have come in the fight with inflation that today’s repeat 2.0% reading elicited a shrug. It is only 20 months ago that the UK was an inflation outlier with prices rising at 11.1%. But policy makers are more concerned with the pace of price rises in the service sector, which accounts for 80% of the UK economy, and which remained unchanged at 5.7%. Core inflation, excluding energy and food, was also flat at 3.5%.
“Tomorrow the focus will be on the employment data, which is forecast to show only a modest decline in basic wage growth from 6% to 5.7%. Wages are a key component of service sector inflation.
“The decision on whether to cut interest rates from a 16-year high of 5.25% next month remains on a knife edge.”
