This article first appeared on GuruFocus.
While inflation has cooled across much of the developed world, the UK is proving stubborn. Consumer prices jumped 3.8% year-on-year in July and are expected to breach 4% by Septemberdouble the Bank of England’s 2% target. The BOE has already slashed interest rates five times, trimming them to 4% from last year’s 5.25% peak. But that hasn’t been enough to rein in prices. Core drivers? Surging energy bills, labor costs, and a 26 billion payroll tax rolled out in Aprilall of which are pushing up input costs for businesses, many of whom are passing them on.
Underneath the surface, the structural headwinds look even more problematic. UK productivity shrank 1% in Q2 compared to last year, putting the country behind most of its G7 peers. Add in lingering Brexit-related trade frictions and food prices that are now nearly 40% higher than pre-pandemic levels, and it becomes harder to argue this is just a cyclical inflation blip. Some pressures, like the summer airfare spike, may prove temporarybut the BOE remains on edge about second-round effects as workers continue to seek higher pay to shield themselves from the cost-of-living squeeze.
Markets still expect a cut to 3.75% in November, but the BOE may hold back if wage growth doesn’t cool as expected. For investors, this means uncertainty lingersparticularly for UK-linked consumer names and housing-sensitive sectors. Even global players like Tesla (NASDAQ:TSLA), which has exposure to the UK market, could feel ripple effects if inflation stays sticky and rate cuts get delayed. The BOE isn’t calling the peak yetand neither should the market.