The latest GfK consumer sentiment index for July showed a rebound in confidence from Q2’s lows. At -17 the reading is now back to levels seen before the start of the US-Iran conflict (chart 1, source GfK), which brought surging oil prices and volatile borrowing costs. The six-point gain from June was the largest improvement in the index since November 2023. 

There were gains across all components of the index, notably a marked improvement in confidence about the general economic situation in the next 12 months (-28 from -36 in June), and appetite to make major purchases (-12 from -20). Gains in confidence about household’s own finances were more modest.

A lot happened in July which could have contributed to the improvement in sentiment – at the start of the month there were high hopes of an end of the Middle East conflict with oil prices back to pre-war levels. There was also the potential for some political stability with the appointment of Andy Burnham as Prime Minister. In week one he put cost of living at the centre of initial policy announcements, including a temporary removal of VAT from household energy bills from October. 

Also in the mix was the prospect of sunny summer holidays and England’s best chance of bringing it home in decades. 

Whether we will see further improvements in households’ confidence is less clear. Inflation is expected to take off again in the second half of this year, including a risk from higher food prices. A loosening labour market and more subdued wage growth means real income growth will remain under pressure. If Middle East tensions continue to flare up into the autumn, bringing inevitable volatility in markets, the consumer mood could darken again.

There was better than expected news on the inflation front in June. CPI fell to 2.6 per cent from 2.8 per cent in the previous two months. The main driver of the drop in June was a slowdown in transport costs (chart 2, source ONS), mainly motor fuels with petrol and diesel prices falling faster than the previous year as Middle East tensions eased.

Food inflation also eased further in June, with widespread moderation in prices across the basket, including falls in dairy products.

The ONS also reported a small downward movement in services inflation, to 3.6 per cent, and core inflation unchanged at 2.6 per cent. Households’ expectations for year-ahead inflation also continued to moderate in July, to 3.4 per cent from 3.8 per cent in June and two percentage points lower than the recent peak in March. 

While UK inflation has been tracking below that reported in the eurozone and US, this is likely to be temporary as CPI is forecast to accelerate again through the second half of the year. We will see the impact of July’s higher energy price cap in the next CPI release (with a further rise in October, albeit offset somewhat by the temporary VAT cut). In addition, the resumption of hostilities in the Middle East will see continued pass through of higher oil and fuel prices in the coming months (and beyond?). 

The Bank of England’s latest Monetary Policy Report (MPR) expects CPI to pick up to 2.9 per cent in Q3 and 3.2 per cent in Q4 (up from two per cent in both quarters in the February forecast). 

The Productivity Institute recently published some new research which will be of interest to anyone working with businesses. The first report looks at the decision-making process behind firms’ investment decisions, based on a survey of over 1,600 firms making investments between 2019 and 2024. 

Among the takeaways, the report finds that the top business objectives in the past 12 months have been sustaining cashflow and increasing sales. These objectives also feature strongly as drivers for investment (chart 3). The data observes a similar picture of priorities for intangible investments, though improving efficiency of business processes is a bigger driver of this type of investment. 

Businesses move quickly, with the survey finding that nearly two-thirds of firms plan their most strategically important investment in less than a year, with 90 per cent planning in less than three years. For around a third of firms, however, there is no formal business case for investments, costs and resources are most cited as factors considered in approving investment (85 per cent), over source of funding (64 per cent) and available business support (50 per cent). 

Against this background, it is unsurprising that the succession of shocks the UK economy has experienced over the period in review has impacted investment plans, though the report notes that “this uncertainty mainly had a qualitative impact, affecting the timing and returns of investments rather than the number of significant investments, the type of investments, or the amount invested.”

Linked to this, a second report from the Productivity Institute takes an innovative approach to determining the characteristics of investment decision-makers in the UK compared with international counterparts. The headline finding (perhaps surprisingly) is that ‘UK managers show broadly equivalent aspiration and growth orientation to their comparator country counterparts.’ In addition, the research doesn’t appear to be definitive on UK managers being more short-termist.  

However, the research does identify other behaviours and attitudes that may be more constraining for UK businesses. For example, there is evidence of greater risk aversion amongst UK managers and a greater tendency towards accepting ‘good enough’ outcomes. These characteristics could impact on the business investment, particularly cumulatively over time, and therefore addressing long-standing productivity challenges.  

Not wobbles in markets (which continue to show volatile momentum for tech stocks and chip manufacturers), but public opinion, according to the ONS Public Opinion and Social Trends survey. ONS has been tracking attitudes to AI since November 2023 and in the most recent survey the proportion of people agreeing that AI will benefit them outweighs those that disagree (37 per cent vs. 27 per cent), but the gap is narrowing.

More of those aged between 16 and 49 years are likely to expect AI to benefit their access to learning and education, and make their job easier. But only around one in eight across this age group expect it to help improve their job prospects. 

Those disagreeing that AI will benefit them has increased from 20 per cent a year ago. In line with this slightly more negative view of AI overall, nearly four in ten respondents (38 per cent) believe AI is more risk than benefit – up from a quarter in August 2024. 

The main worry about AI is that it will make it more difficult to tell whether news or information is fake. The increasing appearance of AI generated content online and on social media, and the speed of improvement and sophistication of this content, is likely fuelling concern, which is fairly consistent across age groups. 

Whether there are some demographic differences is the extent of concern about increasing the chances of experiencing cybercrime (chart 4). 

Around three in five respondents said they AI could increase their personal risk of cybercrime, but among the oldest and youngest cohorts, the proportion agreeing drops to 55 per cent and 53 per cent respectively. There is also a lower awareness of this risk amongst those in the most deprived areas compared with the least deprived areas. 

As UK Finance noted in its Annual Fraud Report, criminals are increasingly using AI to refine and scale attempts to defraud people through impersonation and investment scams. Continuing efforts to raise broad awareness of the risks of AI-generated scams remain a priority.