Time to wrap up.

Interest rate hikes on both sides of the Atlantic look more likely than at the start of the week, after the latest rush of economic data.

In the US, prices picked up in August, lifting the CPI index by 0.4% on a monthly basis, but leaving annual inflation unchanged at 3.4%.

Gasoline prices jumped – up 3.9% in August, and over 27% compared with a year ago.

Lettuce prices slumped, though, as a food poisoning outbreak hit demand for salads.

With prices rising much faster than the Federal Reserve’s annual target of 2%, many (but not all) economists expect the Fed to raise interest rates at its meeting next week.

According to CMEFedwatch, a quarter-point hike from the Fed next Wednesday is now an 86% probability, up from 69% before the inflation report was released.

In the UK, better-than-expected growth figures has cheered the City today – but could also encourage some Bank of England policymakers to lift borrowing costs.

The British economy beat expectations with 0.4% growth in July, partly thanks to increased AI activity within the services sector.

Martin Beck, the chief economist at WPI Strategy, said:

“At a time when many traditional parts of the economy remain subdued, this is exactly the kind of productivity-enhancing spending the UK needs more of.”

But British borrowers could face a squeeze in the coming months – the money markets are now anticipating four interest rate rises by July 2027, up from three at the start of this week.

In the energy world, oil and gas prices have dropped on hopes of a breakthrough to reopen the strait of Hormuz. But Europe still faces a battle to stock up on gas before the winter.

Back in London, the stock market has recorded its first daily rise in over a week.

After five daily falls in a row, the FTSE 100 share index has ended the day up 41.5 points or 0.4% at 10,650 points.

That still leaves the index of blue-chip shares down 1.67% this week, its worst week since 2-6 July.

This month’s drop in US consumer confidence (see earlier post) is a warning sign for Republicans ahead of the Midterm elections, says James Knightley, chief international economist at ING:

The September measure of University of Michigan consumer sentiment is very poor, dropping to 47.8 from 51.7 (consensus 51.0). This is the second weakest reading on record and this series goes back to the 1970s - the weakest was only in May. The damage came from the expectations component, which fell to 45.8 from 51.5. That level has historically been consistent with real consumer spending growth of -2% annualized. Ordinarily we are in recession territory here, but there has been a breakdown in the relationship with consumer spending due to the fact that high income households are dominating the spending story right now.

Middle and lower income households, whose views are picked up in the surveys, are under intensifying financial pressure as wages fail to keep pace with the cost of living. We can also see it in the low savings ratio and the rising credit card and auto loan delinquency numbers.

Worryingly for the Republican Party ahead of the Midterm elections, it is its supporters who have seen the biggest drop in sentiment over the past 12 months - down 20 points versus a five point decline for Democrat supporters.

US consumer confidence has fallen again, as Americans grow more worried about inflation.

The University of Michigan’s consumer sentiment index, just released, has dropped by almost four points to 47.8 points this month, down from 51.7 in August – the second consecutive month of decreases.

The survey found that consumer expectations have fallen this month, and that people are also gloomier about current economic conditions.

Surveys of Consumers director Joanne Hsu explains:

Democrats and Republicans alike posted sizable declines, while independents were little changed from August. Year-ahead expectations for both personal finances and business conditions plunged. With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks to come.

Overall, sentiment is now 16% below February, prior to the start of the Iran conflict, and 13% lower than a year ago, Hsu added.

The US stock market doesn’t appear concerned by today’s inflation report, or the rising chance of an interest rate hike next week.

The Dow Jones industrial average has jumped by 622 points, or 1.2%, to 52,688 points at the start of trading in New York.

The broader S&P 500 index is up 1.05%.

Investors believe the US Federal Reserve is more likely to raise US interest rates next week following August’s inflation report.

Market odds on a rate increase at the Fed’s meeting next week have risen to 82% after earlier touching 90%, Reuters reports. Before the report the market was placing 68% odds on a rate hike on 16 September.

Anthony Willis, senior economist at Columbia Threadneedle, believes a hike next week is a ‘done deal’:

“Expectations for a US rate hike were already climbing after the strong jobs data last week. Historically the narrative was that the Fed would ‘nudge’ market expectations towards at least 70% probability before a policy move, such that policy ‘shocks’ were limited. However, in the new Kevin Warsh era, they appear comfortable to play their cards close to their chest.

“Over the course of this week, helped by higher commodity prices, expectations for a Fed hike had climbed to the 70% level. Given how much weight Warsh has put on the inflation data, and his frustrations with inflation persistently above target for over five years, today’s CPI print felt like the final piece in the jigsaw for a potential policy move next week. In the aftermath of the August CPI release, a Fed hike now appears to be a done deal, with markets now pricing a 93% probability the Fed will hike next week”.

US government borrowing costs have hit their highest level since October 2023, after today’s inflation report showed prices were still rising across the US economy.

The yield on 10-year Treasury bills traded as high as 4.99% shortly after the US inflation report was released.

They’ve now dipped back to 4.93%, though, slightly down on the day…

There are some interesting moves in US food prices last month, even though the index for food at home was unchanged in August.

Four of the six major grocery store food group indexes increased in August – here’s the details:

The meats, poultry, fish, and eggs index increased 0.1 percent over the month, as the eggs index rose 2.9 percent. The index for other food at home also increased 0.1 percent in August. The nonalcoholic beverages index increased 0.2 percent over the month, and the dairy and related products index rose 0.3 percent.

The index for cereals and bakery products was unchanged in August, while fruits and vegetable prices fell 0.4%.

The index for lettuce continued to fall, declining 6.2 percent in August after decreasing 16.4 percent in July.

Iceberg lettuce has been blamed for a surge in American cases of the parasitic illness cyclosporiasis…

US core inflation also picked up a little pace in August.

The index for all items excluding food and energy rose by 0.3% in August, after increasing 0.2% in July.

Indexes that increased over the month include communication, lodging away from home, airline fares, education, and used cars and trucks, the BLS reports.

However, on an annual basis core inflation dipped to 2.4% (above the Federal Reserve’s target for prices to rise by 2% per year), down from 2.5%.

Newsflash: US inflation picked up last month, on a monthly basis, as the surge in motor fuel prices hurt American consumers.

The Consumer Price Index increased by 0.4% during August, the U.S. Bureau of Labor Statistics has reported, up from 0.1% in July.

The annual inflation rate is unchanged at 3.4%.

Pricier gasoline drove up US inflation in August – the index for gasoline rose 3.9% in August, accounting for over one third of the monthly all items increase.

Energy prices jumped by 2.1% in the month – another sign that Donald Trump’s war with Iran is hurting consumers.

Shelter (or housing) became 0.3% more expensive, while food prices increased 0.1% over the month, including a 0.3% rise in the index for food away from home (eg at restaurants).

Investors around the world are bracing for the final significant data release of the week – the US inflation report for August.

August’s CPI report is likely to influence central bank policymakers as they weigh up whether to raise US interest rates at next week’s Federal Reserve meeting.

Economists are forecasting the monthly inflation rate will pick up in August, to 0.4%, from 0.1% in July, while the annual rate is expected to be unchanged at 3.4%.

Core inflation is expected to drop a little, from 2.5% to 2.4%.

But as we saw this morning with the UK GDP report, these expectations can’t infallible.

The report is due in just over 20 minutes time (8.30am on the East Coast, 1.30pm in the UK)

Saxo UK investor strategist, Neil Wilson, predicts the inflation report will move the bond market:

Odds of a Fed rate hike next week have shortened from 60% to 70%, but as the CPI report will dictate assumptions (based on recent Fed speak) we could see another considerable move of size in front-end rates today. The yield curve is like a coiled spring right now.

The economic news from France is less positive than in the UK today.

While Britain’s growth was beating forecasts this morning, French finance minister Roland Lescure ⁠was warning that France’s economy will grow less than expected this year, meaning the government will miss its budget deficit ⁠target,

Lescure told ⁠journalists he was lowering the government’s 2026 economic growth forecast to 0.5% from 0.7% previously, but stuck with a projection of 1.0% for next year.

Lescure explained:

This year has been marked by extreme crises involving four different types of ⁠shocks.

Those shocks were domestic political uncertainty, surging energy prices, extreme summer weather and a jump in borrowing costs on bond markets, Reuters reports.

Lescure also explained that slower growth will make it more difficult for ‌the government to trim its fiscal budget ‌deficit as planned to 5.0% of economic output this year, saying:

The reality is that the budget was built on a 5% assumption. And the ‌reality is that, today, 5% is no longer an option.

UK housebuilder Berkeley Group indicated this morning that it’s not seen a pick-up in the housing market over the summer.

Berkeley Group told shareholders this morning the customer sentiment, and activity in the housing market, have been hit by the ongoing Middle East conflict.

They added:

While Berkeley is receiving good and stable levels of enquiries, the uncertainty and volatility in the market means that customers without an immediate need to move and readily available liquidity remain more cautious to commit, a position similar to that reported with our full year results in June.

Berkeley Group went on to call for “urgent reform” of the UK’s current stamp duty regime.

The company is proposing a 1% cap for first-time buyers and downsizers, and the removal of a 5% surcharge on investors.

Hopes of a temporary deal to reopen the strait of Hormuz are driving the oil price down today.

Brent crude is now down 2.7% at $104.70 a barrel, wiping out some of yesterday’s 6% rise.

Energy prices are dropping after reports that Gulf states are considering meeting with Iranian officials next week to discuss the future of the Strait of Hormuz.

If it happens, this would be the first meeting between the top diplomats from the six-member Gulf Cooperation Council and a senior Iranian official since the US -Israel war on Iran began in February.

According to the Financial Times, the meeting is scheduled to be held on Monday in the Omani coastal city of Salalah.

Bloomberg has the details:

Oman is aiming to get foreign ministers from the Gulf Cooperation Council and Iran together on Monday in Salalah, a southern Omani city, according to a person familiar with the matter, who asked not to be identified discussing sensitive matters.

The meeting is not confirmed and worsening hostilities between Saudi-backed forces and the Houthis, a group based in Yemen and supported by Iran, may complicate the plans, another person said. Even if it happens, it’s unclear if all states in the bloc, including Saudi Arabia, the United Arab Emirates, Qatar as well as Oman, will attend, the people said.

Despite today’s drop, oil is up almost 9% this week, the biggest weekly jump since July.

Another a week of turbulence, UK government bonds are recovering a little this morning.

With prices rising, the yield (or interest rate) on UK sovereign debt is dipping slightly.

The yield on 10-year UK bonds is down 2 basis points (0.02 of a percentage point) to 5.351%, away from the 19-year high hit yesterday.

30-year bond yields are dow 2bps too, to 5.91%, having hit their highest since 1998 yesterday.

Bond yields are very sensitive to moves in the oil price this week – crude prices are still down around 2% today, after surging yesterday to their highest since mid-May.

Chancellor John Healey has welcomed today’s GDP report, saying:

“Britain’s economy is demonstrating a welcome resilience, despite serious global uncertainty.”

Berenberg economist Andrew Wishard also believes that July’s solid GDP report could encourage the Bank of England to raise interest rates before Christmas.

He says the 0.4% growth recorded in July hints that the current bank rate of 3.75% may not be as restrictive as he and some BoE rate setters thought.

Wishard explains:

Rolling quarterly growth came in at 0.4% in May-July compared to the previous three months, in line with Q2’s expansion.

Evidence that economy could cope with a solitary 25bp interest rate hike adds to the risk that the BoE will deliver one in November or December. However, as the central bank struggles to trust the official GDP data, broader evidence of solid growth would need to follow this strong outturn to convince it.

Reuters has spotted that Britain’s economy grew at the fastest annual pace in 18 months in July.

British GDP in July was 1.6% higher than a year earlier, the fastest annual rate since February 2025, they point out.

The sight of the UK growing faster than expected could spur the Bank of England to raise interest rates before Christmas.

Angeline Ong, senior technical analyst at the broker IG, says today’s forecast-beating UK GDP report will boost rate hike expectations:

The upside surprise hands ammunition to BoE hawks pushing for a Q4 rate hike, even as gilt yields already sit at multi-decade highs on Middle East shipping attacks and firm US data.

After this week’s surge in the oil price, which drove bond yields higher, investors have already hiked their expectations for UK interest rate rises.

One rate rise by November is now priced in, with the money markets now anticipating four quarter-point hikes by July 2027, which would lift Bank rate to 4.75%, from 3.75% today.

At the start of this week, the markets were pricing in three rate rises by July 2027.

These expectations jumped yesterday, when the European Central Bank raised eurozone interest rates to 2.5% and warned that the risk of higher inflation over the next year has risen.

There’s a danger that the UK economy slows later this year, points out Andrew Hunter, senior economist at Moody’s Analytics:

The 0.4% rise in U.K. GDP in the second quarter was slightly stronger than we expected and suggests the economy has remained resilient to the surge in energy prices.

Adding to the positive news, growth was driven by solid gains in household consumption and business investment, and included a healthy 0.3% monthly rise in output in June, suggesting momentum was sustained as the quarter progressed.

That said, it is worth remembering the repeated pattern in recent years of strong growth in the first half of the year being followed by a sharp slowdown in the second, and the downside risks—ranging from the U.S.-Iran conflict to pressures on the U.K.’s fragile public finances—remain high. Overall, we continue to forecast more modest growth over the rest of 2026.

Although the UK economy recorded decent growth in July, that doesn’t take the economic pressure off UK households.

Yael Selfin, chief economist at KPMG, cautions:

“A strong July provides a robust start to the third quarter, although weakness in consumer-facing sectors points to softer growth.

“Despite strong activity in July, the headline growth figure masks a weaker picture for households. Consumer-facing services contracted in July, as retail and hospitality activity fell following earlier increases in activity in the summer. Higher energy and fuel prices are likely to place further pressure on household budgets, while elevated mortgage rates will continue to weigh on housing activity and wider consumer spending.

Economists are reacting favourably to today’s forecast-beating UK GDP data, showing the economy grew by 0.4% in July.

Paul Dales, chief UK economist at Capital Economics, is hopeful that AI could prove to be a longer-lasted support to real activity, saying:

The strong 0.4% m/m rise in real GDP in July (consensus and CE forecasts both 0.0%) suggests that the resilience of the economy in the first half of the year continued into the second half. But higher energy prices and borrowing costs will soon take a bigger toll on real activity, especially if this week’s big leaps are sustained.

Ben Jones, CBI senior lead economist, says Britain’s economy has been more resilient to the Iran war than expected:

Stronger-than-expected growth in July suggests that the economy carried some of its first-half momentum into Q3.

But although the economy has proved more resilient to the fallout from the Middle East conflict than initially seemed likely, the second half of the year looks a bit more challenging. Higher household energy bills are beginning to bite, while volatile energy markets and a global bond-market sell-off are adding to uncertainty and pushing up borrowing costs.

Richard Carter, head of fixed interest research at wealth manager Quilter Cheviot, warns that future growth will be ‘hard to come by’:

Having bathed in sunshine for the vast majority of the month, and England experiencing a run to the World Cup semi-finals, the UK economy bucked expectations with solid growth of 0.4% for July. Growth was experienced in all three sectors, with services continuing to do much of the heavy lifting, although this masks a somewhat more concerning three-month picture for production and construction.

The concern was that the UK was likely to experience another year when the economy runs out of steam when it comes to growth. After a better than expected first half last year, the economy spluttered to a halt in the latter half. But tentative signals are that things may be different his time around, despite the geopolitical situation showing no sign of abating. Growth is going to be hard to come by so this may not last, especially as activity is likely to stall ahead of the Budget. Indeed, there appears little consistency in the growth experienced by the UK right now, with today’s decent rise coming off the back of a contraction in April (-0.1%), no growth in May (0.0%) and a modest return to growth in June (0.3%).

England’s sensational run to the third-fourth playoff in the Men’s football world cup, and the heatwave, both affected the UK economy in July, the ONS says.

But computer programming was a major factor behind July’s growth, as the AI boom pushed up activity.

Here’s ONS director of economic statistics Liz McKeown explaining why the economy grew by 0.4% in July:

Growth remained relatively robust in the latest three months, as ongoing strength in the services sector was only partially offset by falls in both production and construction.

Within services, computer programming was the largest contributor, continuing the strong growth seen throughout the year, with evidence that businesses involved with AI and related technologies helped to boost this sector.

Continuing recent trends, research and development and rental and leasing also helped drive growth, while wholesaling saw a notable fall.

Looking at the latest month, services also drove growth in July, with computer programming again making the largest contribution. Separately, as in June, some businesses reported that the warm weather and FIFA World Cup had affected their activity, although effects differed across industries, benefitting some businesses while creating challenges for others.

Newsflash: The last month of Keir Starmer’s premiership ended with stronger-than-forecast growth.

New data from the Office for National Statistics shows that the UK economy expanded by 0.4% in July alone, smashing forecasts that the economy would stagnate during the month.

That follows growth of 0.3% in June 2026 and no growth in May 2026.

The ONS says the growth in July was because of rises of 0.4% in services, of 0.2% in production and of 0.1% in construction.

More to follow …

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

We’re about to learn how the UK economy fared in July, during the summer heatwave.

July’s GDP report is expected at 7am. And economists are not optimistic there was much growth during the month – the concensus forecast is that GDP will be unchanged compared to June,

Over the last three months, that would slow growth to 0.3%, down from 0.4% in April-June, highighting the economic challenges facing chancellor John Healey.

A poor GDP report could add to jitters in the markets, where government bonds suffered another sell-off yesterday.

This sell-off pushed the yield, or interest rate, on 10-year UK government bonds to over 5.37% – the highest cost of borrowing since 2007.

The agenda

• 7am BST: UK GDP report for July

• 7am BST: UK trade report for July

• 1.30pm BST: US CPI inflation report

• 3pm BST: University of Michigan’s US consumer confidence report