18 July 2025

Jonathan Sparks

Chief Investment Officer, UK, HSBC Private Bank and Premier Wealth

We’re seeing a familiar tug of war in the US data for June, on one side, modest month-on-month gains in headline and core CPI (Consumer Price Index) (0.3% and 0.2%, respectively) that broadly met consensus; on the other, tell-tale signs of tariff pass-through in a handful of consumer categories. Bananas, coffee and household supplies all registered unusually large price bumps in recent months and sports equipment surged nearly 1.8% month on month. Taken together, those items account for only a few basis points of headline CPI, but they underscore how import duties are beginning to nibble at consumer prices. Meanwhile, rental inflation is finally decelerating as asking‐rent data from Zillow are lagging the CPI shelter series, but both point to year-on-year rent growth falling below 4% in coming months and closer to 3.5% by year‐end. That moderation in services, alongside our expectation that motor fuel will peak seasonally in July or August, leaves us comfortable retaining our 2.8% forecast for average CPI in 2025 (and 3.0% in 2026).

Across the Atlantic, the UK printed a mild upside surprise in June, with headline CPI climbing from 3.4% to 3.6% year on year (versus 3.4% consensus) and core inflation edging up to 3.7%. Much of the extra heat came from transport as petrol prices rose slightly month‐on‐month despite a smaller gain than last June, and airline fares posted their biggest one-month jump since 2018. Clothing, alcohol and tobacco, and recreation also added incremental pressure, pushing RPI inflation up a tenth to 4.4%. Yet beneath the bumps, services inflation held steady at 4.7%, roughly in line with its post-pandemic average, suggesting that the stickiest elements of the basket may finally be stabilizing.

What does this mean for policymaking? In the US, the FOMC (Federal Open Market Committee) is wrestling over whether recent tariff-linked price rises will prove a fleeting shock or something more enduring. Minutes from June’s meeting flagged a split of views as some saw only a “one-time” uptick, others worried about longer-term pass-through and President Logan of the Dallas Fed has reminded markets that inventories and fixed-price contracts can only delay, not eliminate, the effects of higher import levies. Our working assumption remains that underlying inflation will drift lower through next year, but we’re watching labour costs, shelter trends and cross-border price pressures closely for any signs of renewed heat. On top of those underlying dynamics, markets got a jolt on July 16 when President Trump reportedly threatened to fire Fed Chair Jerome Powell. Long-term Treasury yields spiked, inflation breakeven jumped and equities sold off and all within a matter of minutes, before the threat quickly receded. While short-lived, the episode was a stark reminder that political brinkmanship can feed straight into financial-market volatility and, ultimately, into borrowing costs and inflation expectations.

In the UK, the Bank of England’s MPC (Monetary Policy Committee) will take heart from the rollout of cheaper services inflation, but June’s upside surprise and signs of lingering price stickiness mean that rate cuts are unlikely to come as quickly or as deeply as markets have been hoping. Governor Bailey has noted that the path for policy is “gradual” and “careful,” and with labour cost growth still above pre-pandemic norms, we expect the first 25 bp cut to arrive only in August (and even that only if slack widens more rapidly than currently visible). Taken together, both central banks face a delicate balancing act, i.e., lean against the fading impulse from tariffs and energy yet stay vigilant for any re-acceleration in services or core goods inflation.

Source: Bloomberg