After UK inflation rose for the first time since January, wealth managers discuss the timing of another potential interest rate cut and the impact on asset allocation.

UK annual headline inflation came in at 2.2 per cent in July, up from 2 per cent in June, but below consensus forecasts for 2.3 per cent, according to data from the Office for National Statistics. The figures come after the Bank of England’s narrow 5 to 4 vote to deliver its first interest rate cut of 25 basis points at the start of the month.

The figures are the first rise in inflation since January – slightly above the Bank of England’s (BoE) 2 per cent target rate. Services inflation, however, fell by more than expected to 5.2 per cent from 5.7 per cent, and core inflation – which excludes volatile food and energy – decreased to 3.3 per cent from 3.5 per cent in June.

Here are some reactions to the news from investment managers.

Mark Haefele, chief investment officer, UBS Global Wealth Management 
“The latest UK inflation print shows the rate is still near the BoE’s 2 per cent target. Following the BoE’s 25 bps cut at the start of the month, we expect another 25 bps cut in November with more to come in 2025, which should help boost equity valuations and earnings. We rate UK equities as most preferred, supported by accelerating domestic growth, our positive view on oil and industrial metals prices, and relatively attractive valuations. To prepare for lower rates, investors should consider redeploying excess cash, money market funds, and expiring fixed-term deposits into high-quality corporate and government bonds.” 

Nicholas Hyett, investment manager, Wealth Club 
"Economists had expected a bit of an inflationary heatwave over the summer, as the effects of lower food and energy prices started to drop out of the numbers and core inflation continued to run hot. In the event, the inflationary heat has picked up a bit, but not quite to the degree that had been feared. 

“Crucially, core inflation continues to fall steadily and is now at its lowest level since September 2021. It is this number which is key to the long-term outlook for the UK and which will drive Bank of England interest rate decisions. All economies are buffeted by global commodity prices, it's domestically generated inflation that policymakers focus on. Services inflation remains higher than you might like, at 5.2 per cent, although it did fall, thanks mainly to a substantial fall in hotel costs year-on-year. As a labour intensive industry, hotel prices can be a bit of a bellwether for the wider labour market – so softness here, coming after lower wage growth yesterday, will be reassuring. The Bank is probably feeling pretty pleased about the timing of its first rate cut at the moment.”

Andrew Lilico, economics fellow at the free market think tank, the Institute of Economic Affairs
“Today’s inflation figures support the case that the Bank of England has been too slow in cutting rates. Services inflation, which the Bank has overemphasised in its thinking, is down sharply from 5.7 to 5.2 per cent in the year to April. Concerns about price rises in hotels and restaurants in the year to June proved short-lived, falling back in July. A slight rise in headline inflation was expected as a result of movements in energy prices. Overall, the picture indicates that inflation is likely to undershoot the Bank’s expectations and supports the case that concerns about inflation being persistent based on a wage-price spiral are misplaced. This is unnecessarily impeding growth at a time when the economy should be seizing the opportunity for investment in emerging new technologies. Failing to take full advantage of this moment could mean a lasting failure to boost UK growth – a boost that is sorely needed.”

Jonny Black, chief commercial and strategy officer at abrdn Adviser
“This ends a brief two-month stint at target, and is a clear sign that savers and investors need to stay on their toes. While future inflation trends look positive, there’s always the risk of resurgence – these are still volatile global economic conditions, and factors like sudden supply chain shocks could send prices upwards, faster, once more. It remains critical that savers and investors plan for a range of scenarios and consider how they can mitigate inflation’s effects on their strategies. Advisors will have an important role to play here.”   

Andy Mielczarek, CEO of Chetwood Financial 
"Today’s news is not necessarily a sign that we are on the wrong path, or that there is cause to panic. Recent wage increases are hopefully helping to soften the blow of higher prices, and the promise of more base rate cuts in the near future should be a source of optimism for mortgage holders. Many savers may have mixed feelings about today’s news, but those with the best instincts will be focused on improving their financial health by tracking the best rates for savings' products and making the most of the current offering before rates fall any further."

Nathaniel Casey, investment strategist at wealth management firm Evelyn Partners
“With all four main measures of inflation coming in below expectations today, the inflation picture will remain a source of encouragement. Markets are currently still split on whether the BoE will cut rates again at their September meeting or if they will replicate the actions of the European Central Bank and pause after their first cut, but committee members will still have one more month of macro data to inform their decision before then.”

Joaquin Thul, economist at EFG Asset Management  
“Overall, these last two days have given the monetary policy committee (MPC) mixed signals about the state of the UK economy. On one hand, the pick-up in inflation was lower than what was expected by markets, attributed to a decline in services prices, which partially offset the change in energy prices. Together with this, the data on wage growth would confirm that effects of past shocks to the UK economy have now started to fade. On the other hand, the tightness of the labour market will continue to weigh on the decision to cut interest rates in the future. Therefore, these indicators are unlikely to give enough evidence to the MPC to cut interest rates again in September, with the next cut expected at the meeting on 7 November. Markets are currently pricing two more 25 bps rate cuts for November and December.”