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The Bank of England has a new headache to deal with as headline inflation rose to 3.6%, its highest in over a year. The figure came in higher than the 3.4% which was economists expectations based on a Reuters poll.
Services price inflation, which the Bank of England sees as a better indicator of local price pressures than overall CPI, stayed at 4.7% in June, defying economists’ expectations of a drop to 4.6%.
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British inflation has been climbing since hitting a three-year low of 1.7% last September. In May, the Bank of England predicted it would peak at 3.7% this September, nearly double its 2% target.
The main driver of the increase from May to June was higher transport costs, especially motor fuel, according to the ONS. A rise in motor fuel echoes US inflation released yesterday and this could in part be down to the spike in Oil prices last month during the Israel-Iran conflict.
In April, inflation jumped sharply to 3.5%, driven by higher energy and water bills, a surge in airfares, and increased costs for labor-intensive services due to higher employment taxes and a rise in the minimum wage.
Labor Market Poses a Challenge as Growth Stalls
Governor Andrew Bailey said interest rates will likely keep falling slowly because a weaker job market is slowing wage growth, and the economy’s growth outlook remains weak.
Chancellor Rachel Reeves shrugged off concerns around growth in the UK only yesterday as she told bankers she would slash red tape to help reboot the economy.
Some Bank of England policymakers worry that skill shortages in the UK job market and other supply issues will keep wages growing too quickly, making it hard for inflation to return to its target soon.
Important UK labor market data is coming on Thursday. If May’s payroll drop of -109k isn’t revised and June shows more declines, the pound could come under renewed selling pressure.
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Market Reaction
Chancellor Rachel Reeves responded to the unexpected rise in inflation to 3.6%, acknowledging that “working people are still struggling with the cost of living.”
She highlighted steps already taken, like raising the national minimum wage for three million workers, introducing free breakfast clubs in all primary schools, and extending the £3 bus fare cap.
Reeves admitted “there’s more to do” but promised to stick to the Plan for Change to help people keep more money in their pockets.
Traders pare BoE easing bets after UK CPI, seeing 49 bps this year down from around 51 bps prior to the inflation release.
The British Pound did jump immediately after the data and it will be intriguing to see if the Pound can continue its advance in the European session.
GBP/USD has been under strain of late as the pair has posted 8 consecutive days of decline.
Having broken a crucial long-term ascending trendline and the growing macro challenges, the British Pound faces a fight to hold onto its impressive gains in 2025.
GBP/USD 15M Chart, July 16, 2025
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Source: TradingView.com
For a more in depth look at the technical picture for GBP/USD, Please read GBP/USD Vulnerable as Trendline Break Sets Up Potential 600 Pip Drop
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