Commenting on UK CPI inflation coming in at 2%, Olivier Konzeoue, FX Sales Trader at Saxo Markets, said: “CPI rose by 2% in the 12 months to July 2021, down from 2.5% in June and below the 2.3% expected. This is the first time UK inflation has fallen back to 2% since April and the first time in a while that UK CPI doesn’t match economists’ consensus.  

This drop can be partly explained by the sharp rise in prices observed in July 2020 as lockdown restrictions were eased more broadly.

This slowdown in inflation is broadly regarded as a blip. The Clothing and Footwear sector as well as Recreational and Culture were attributed the largest downward contributions whilst price for transport represented the largest upward contribution to change. At last, manufacturers felt a stronger than expected inflation. Their input prices were up 9.9% in July (from 9.7% the previous month) whilst output costs also rose 4.9% which was more than expected (4.4%)  

All in all, inflation in the UK is expected to pick up again in the coming months although base effects could create some further noise in future data. Investors may have just had a glimpse of how sharply inflation could fall once distortions implied by the pandemic have faded. Markets seemed unmoved by the print, FTSE trades flat to mildly negative, GBP is on the backfoot as are most G10 currencies versus USD due to new COVID outbreaks globally causing a flight to traditional safe havens.”