U.K.'s CPI Report Is An "Uncomfortable" Print for The Bank of England, Says Deutsche Bank

10:40 AM EDT, 07/16/2025 (MT Newswires) -- The United Kingdom's June inflation data surprised to the upside -- coming above our higher-than-consensus projections, said Sanjay Raja, Deutsche Bank's Chief UK Economist, after Wednesday's consumer price index.

Headline CPI now sits at 3.58% year over year and core CPI sits at 3.66% year over year. Services CPI sits at 4.73% year over year.

According to the bank, the upside in CPI was broad-based:

-- Services inflation came in above the BoE and Deutsche Bank's projections of 4.77% versus 4.6%, with airfares, motor insurance, transport costs, and accommodation prices all surprising to the upside.

-- Core goods inflation also came in above the bank's projections of 1.7%, landing at 1.8% year over year. Things like health goods, semi-durables, and durables shot up higher than we expected.

-- On food, alcohol and tobacco: Deutsche Bank saw some strength in alcohol prices but as a positive for the BoE's Monetary Policy Committee (MPC), processed food, seasonal food and meat prices all undershot the bank's projections.

Perhaps given the focus on the labor market, Wednesday's CPI data may hold more weight when it comes to shaping the monetary policy outlook, stated Raja. But Wednesday's data won't give the MPC any sense of comfort on the inflation side. Headline CPI, core CPI, services CPI, and core goods CPI now all sit above BoE staff projections.

All of the BoE's core services measures have also increased in June. Deutsche Bank expects headline CPI to push closer to 4% year over year after the summer, before beginning its slow descent back to target later next year. The BoE will be watching closely the implications on inflation expectations, which already look a bit "uncomfortable," added Raja.

This kind of data won't motivate the MPC to contemplate faster or sequential rate cuts. In fact, the bar for a dovish surprise on Thursday's labor market data will likely rise on the back of Wednesday's inflation reading, the economist added.

Deutsche Bank doesn't think the August rate cut is in jeopardy. There's enough of a slowdown in gross domestic product and the labor market to warrant a 'gradual and careful' easing of monetary policy. But the onus now rests on the labor market to shape how far and how fast the MPC can cut this year and next, according to Deutsche Bank.

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