Inflation vs Inflation
If you cast your mind back to late 2024 I’m sure your first thought will be inflation back below the Bank of England’s 2% target. Since then the Bank has still proceeded with two modest interest rate cuts. With UK headline inflation being read at 3% yesterday, is inflation rearing its ugly head once again in the UK? As ever, yes and no is the answer. Seasonal and historical effects were expected to allow inflation to rise before peaking in the middle of this year. Therefore, rising headline inflation is not necessarily indicative of sustainable and therefore concerning inflationary pressures in the UK economy.
A reading of 3% in headline inflation was admittedly above expectations. As had been expected, energy prices and grocery prices were largely to blame for this overshoot. Services inflation however, that which markets and the Bank of England have long been more interested in, undershot the forecast. The level of annual services inflation is still elevated – the statistic was read yesterday at 5% versus a forecast of 5.2%. Overall yesterday’s publication of UK price data paints a picture still commensurate to falling inflation in 2025.
A hot headline inflation publication was therefore unable to support GBP. As yesterday’s session progressed cable lost its grip on 1.26 as the Dollar gained ground across the board. Whilst markets remain sensitive to incoming data and broader risk sentiment, yesterday’s publication should not provide upward pressure to UK yields. The BoE’s own forecasts remain highly conservative on inflation meaning that if anything GBP could expose downside risks if we see revisions lower in core and services CPI in the coming months.
Discussion and Analysis by Charles Porter
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