UK inflation steady at 3.8% as markets brace for Fed decision

​​​UK inflation data shows mixed signals

​Britain's headline inflation rate remained unchanged at 3.8% in August, meeting economist forecasts but staying well above the Bank of England's (BoE) 2% target. The figure represents a stubborn persistence in price pressures that continues to challenge policymakers.

​Services inflation provided some relief, slowing more than expected to 4.7% from the previous month's reading. This deceleration in the services sector suggests domestic demand pressures may be beginning to ease, offering hope for future monetary policy flexibility.

​Core inflation metrics painted a similar picture of gradual moderation. The underlying price pressures that central bankers watch most closely showed signs of cooling, though the pace remains frustratingly slow for those hoping for swift progress.

​The mixed nature of these figures reflects the complex economic environment facing the UK. While some sectors show cooling, others continue to experience significant price pressures that maintain the overall elevated inflation rate.

​Food price pressures mount for consumers

​Food inflation surged for the fifth consecutive month, reaching 5.1% in August - the highest level since January 2024. This acceleration places additional strain on household budgets already stretched by the cost-of-living crisis.

​Vegetables, cheese and fish drove much of the increase, highlighting how specific commodity price movements can have outsized effects on overall food costs. These categories represent staples in many British households, amplifying the impact on disposable income.

​The persistent rise in food prices contrasts sharply with earlier hopes that grocery inflation had peaked. Supply chain disruptions, weather-related crop issues, and ongoing global trade tensions continue to push food costs higher.

​For traders monitoring inflation trends, food price movements offer early signals about consumer spending power. Rising grocery bills typically translate into reduced discretionary spending, affecting retail and leisure sectors across the economy.

​Market reaction remains muted across assets

​Sterling showed little immediate reaction to the inflation data, trading near $1.36 as investors appeared to view the figures as largely in line with expectations. The pound's stability suggests markets had already priced in this level of inflation persistence.

​Gilt yields slipped slightly following the release, with government borrowing costs edging lower as bond markets digested the mixed inflation signals. The modest decline in yields reflects ongoing uncertainty about the BoE's next policy moves.

​Rate cut expectations remained largely unchanged, with traders still pricing only modest easing this year. The persistent above-target inflation provides the Monetary Policy Committee with limited room for aggressive policy loosening despite economic growth concerns.

​Currency markets showed similarly restrained responses, with major pairs trading within tight ranges. This subdued volatility reflects the current wait-and-see approach as investors position ahead of key central bank decisions.

​Corporate earnings provide bright spots

​Centrica shares gained ground following a Morgan Stanley​​​ upgrade, providing some positive momentum in an otherwise cautious market environment. The energy supplier's improved outlook reflects stabilising utility sector fundamentals and clearer regulatory frameworks.

​McBride, Moonpig and PZ Cussons all rose on upbeat earnings results, demonstrating that individual company performance continues to drive share price movements despite broader market uncertainty. These gains highlight opportunities for stock pickers in the current environment.

​AstraZeneca faced pressure after a late-stage trial of its Fasenra drug failed to meet expectations. The pharmaceutical giant's setback illustrates the inherent risks in biotech investments, where single trial results can significantly impact valuations.

​Tech investment pledges provided another source of optimism, with Microsoft, Nvidia, Google, Salesforce, CoreWeave and BlackRock unveiling multi-billion-pound UK commitments. These infrastructure investments signal confidence in Britain's digital economy prospects despite current economic headwinds.

​Fed decision dominates global sentiment

​Wall Street closed lower on Tuesday as investors positioned cautiously ahead of the Federal Reserve's (Fed) policy announcement. The S&P 500 fell 0.13%, while the Nasdaq 100 declined 0.07% and the Dow Jones dropped 0.27%.

​Traders are pricing in a quarter-point rate cut at today's Fed meeting, with particular attention on Jerome Powell's press conference tone and updated economic projections. The central bank's forward guidance will likely prove more market-moving than the widely expected rate reduction itself.

​August retail sales data complicated the Fed's decision-making process, rising 0.6% against expectations for 0.2% growth. This resilience in consumer spending reinforces the economy's underlying strength while potentially reducing urgency for aggressive easing.

​European markets struggled, with the STOXX Europe 600 falling 1% on Tuesday in its biggest one-day decline in nearly a month. Automotive and real estate sectors led the decline, reflecting sector-specific concerns about economic growth prospects.