The most recent data from the Office for National Statistics (ONS) reveals that UK consumer prices remained steady in January, as both headline and core inflation figures matched those from previous months but fell short of economists’ expectations. This article will analyze the implications of these inflation numbers and discuss their potential impact on the UK economy.
According to the ONS, headline inflation in the twelve months to January rose by 4.0%, which was slightly lower than economists’ forecast of 4.2%. The core inflation measure, which excludes energy, food, alcohol, and tobacco, came in at 5.1%, also falling short of expectations by 0.1%. Additionally, headline inflation missed the Bank of England’s (BoE) projection of 4.1%.
Services inflation, a key indicator monitored by the BoE to assess domestic price pressures, climbed less than expected. It increased by 6.5% on a year-on-year basis, compared to the forecasted 6.8%. The ONS highlighted that higher gas and electricity charges in housing and household services contributed the most to the monthly change in both CPIH and CPI annual rates. Conversely, furniture, household goods, food, and non-alcoholic beverages made the largest downward contributions.
These inflation figures will likely come as a relief to the Bank of England, especially after recent sticky wage data. However, the upcoming preliminary Q4 (2023) GDP number is anticipated to indicate a mild technical recession for the UK economy. Forecasts predict a -0.1% print, matching the Q3 release. Traders have already adjusted their rate-cut bets, reflecting a dovish tone following the CPI data. The Overnight Index Swaps (OIS) indicate that the first 25bps cut for the BoE Bank Rate is expected at the August policy-setting meeting, moved forward from September after the CPI numbers. Furthermore, a total of 75bps of easing is now priced in for the year-end, up from 64bps before the CPI print.
The release of the CPI data resulted in weakness across GBP pairings, as gilts rose sharply, sending yields lower across the curve. FTSE 100 futures also surged, opening +0.6% higher. These market reactions indicate that investors are adjusting their positions in response to the inflation figures.
The FP Markets Research Team recently shared their analysis of the GBP/USD, highlighting a bearish sentiment for the currency pair. The monthly chart shows that resistance at $1.2715 is acting as a ceiling for bears, providing an opportunity to push south towards the support level at $1.2173. Notably, the daily price is also approaching the range low from $1.2540, suggesting a potential break of the range lows.
The latest UK inflation figures, which align with prior months and fall short of expectations, have important implications for the economy. While the numbers alleviate concerns at the Bank of England, a potential technical recession looms ahead. Market reactions, such as strengthened gilts and higher FTSE 100 futures, reveal the adjustments made by investors. Additionally, the analysis of the GBP/USD demonstrates the bearish sentiment towards the currency pair. These developments signify a cautious outlook for the UK economy as it navigates through various challenges and uncertainties.
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