UK: Inflation Upside Risks Are Building - Deutsche Bank

The UK's July inflation data appears unremarkable on the surface, but Deutsche Bank warns that new price pressures are building beneath the calm exterior. Sanjay Raja, the bank's chief UK economist, said the combination of a rise in headline CPI and flat core CPI was driven mainly by higher energy bills from the Ofgem price cap increase and a low base effect from the same period last year. Meanwhile, food and core services inflation slowed, providing a temporary buffer against the energy price shock.

**Energy and Base Effects Are Key Drivers**

Raja stressed that the current inflation structure does not mean the all-clear has been sounded. As the impact of energy price adjustments gradually filters through in the coming months, combined with a lower comparison base from the second half of last year, headline inflation faces clear upside risks. Deutsche Bank expects CPI to rise on a year-over-year basis to a peak of nearly 3.5% later this year (excluding Q2 2026), well above current levels. This path implies that the persistent inflation risks facing the Bank of England's Monetary Policy Committee (MPC) have not subsided.

**The Path to Lower Inflation Is Unlikely to Be Smooth**

Despite some easing of price pressures in certain areas, Deutsche Bank believes the improvement in the inflation outlook will be slow and uneven. The bank forecasts average CPI growth of 3.1% for the full year this year, easing to 2.6% next year, but upside risks will continue to build through 2027. Raja's warning suggests that markets should not mistake the surface stability of a single month's data for victory in the inflation fight. For the Bank of England, when weighing the timing and pace of future rate cuts, it must confront the potential second-round effects of rebounding energy costs, which means monetary policy will need to remain sufficiently restrictive for the foreseeable future.