UK Inflation Comes in Unexpectedly Lower

UK Inflation Comes in Unexpectedly Lower
by, David Frank, Economist

Points to consider in this Forex article:

• UK inflation eases to 0.9 percent in October. This is down from one percent in September and below the forecast.
• British Pound weakens against the US Dollar.

This morning, the United Kingdom released its headline inflation for the month of October. The consumer price index (CPI) came in at 0.9 percent. This is below the one percent reported in September. Analysts and economists expected an annual print of 1.1 percent. As a result, the British Pound moved lower, for the second day in a row, against the US Dollar as hopes for a rate cut from the Bank of England (BOE) are being kept alive. This will weaken the British Pound even further.

The official numbers, which include the reduction in the core rate of inflation came in a t 1.2 percent down from 1.5 percent and below the 1.4 percent increase predicted by economists. This came despite the recent decline in the value of the Sterling Pound since the United Kingdom voted, in a referendum, to leave the European Union. This event is known as Brexit. This expected the rate of inflation to increase. However, producer prices rose more-than-expected annually. This points to signs that the Sterling Dollar, and its persistent weakness could lead to inflation growing over the months to come.

Inflation could force the Bank of England’s Hand

Over the last several weeks, particularly at their November monetary policy meeting, the Bank of England released its Quarterly Inflation Report. In this report their policy arm, the Monetary Policy Committee (MPC) struck a cautiously hawkish tone in response to a weakened local currency. However, while the central bank could still make a move with interest rates, in either direction, the recent inflation data will dampen their hawkish tone. This could lead to further weakness with the British Pound in the near-term. However, this data did show strong competition with the nations supermarkets is keeping the price of food in check. At least for right now.

In retrospect, today’s miss was not a total surprise. Thanks to a quirk in the economic calendar as well as the methodology used to collect and formulate the inflation number, only served to amplify the base effect for last month. This means, thanks to a weakening Sterling, we could still expect inflation to move higher over the next coming months, exceeding the central bank’s target of two percent before the second half of 2017. This is still a distinct possibility and not out of reach, by any means.

In other news, this morning, BOE Governor Mark Carney spoke. He reiterated that he will leave his post after 2019. In comments to the House of Commons Treasury Committee, he said that blaming monetary policy for inequality is nothing but a “massive blame-detection exercise.” His comments did little to effect the Pound this morning as investors were more interested in the inflation number as it gave more guidance into the direction of monetary policy.

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