Consumer prices were surprisingly soft in July. A 0.2 percent monthly fall was a couple of ticks below the market consensus but with prices down fully 0.4 percent in July 2023, still firm enough to lift the yearly inflation rate from 2.0 percent to 2.2 percent. This made for the first increase since last December and leaves headline inflation 0.2 percentage points above target.

The main upward pressure on the annual rate came from housing and household services where inflation accelerated from minus 4.7 percent to minus 1.5 percent, largely due to a smaller monthly fall in utilities prices than a year ago. Clothing and footwear (2.1 percent after 1.6 percent) and miscellaneous services (3.5 percent after 2.9 percent) also provided a boost. On the downside, restaurants and hotels (4.9 percent after 6.2 percent) subtracted as did transport (0.2 percent after 0.9 percent). Consequently, the core rate continued to fall and, at 3.3 percent, down from 3.5 percent, undershot expectations and saw its lowest level since September 2021. Overall goods inflation increased from minus 1.4 percent to minus 0.6 percent but its services counterpart dropped from 5.7 percent to 5.2 percent, equalling the weakest print since May 2022.

The BoE had already been expecting headline inflation to rise over the latter half of the year so the July report is unlikely to come as a major surprise. Still, it will probably leave the four MPC hawks who voted against the cut in Bank Rate earlier this month all the more wary about easing again as soon as September. However, the sharp fall in the core rate and slowdown in services should sit well with the doves and, on balance, the chances of another cut next month have probably increased slightly. Today's inflation updates data put the UK's RPI at 11 and the RPI-P at 36, meaning that economic activity in general is running somewhat ahead of market forecasts.

June's 2.0 percent headline rate was right on the Bank of England's target but July's rate is seen climbing to 2.3 percent.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.