UK CPI Hits Expectations, With Little Impact on Sterling

May’s key UK headline inflation figure came in at 4.5% year-on-year – in line with market forecasts – with retail prices and core Consumer Price Index (CPI) easing. While consumers would not welcome higher prices, sterling would have benefitted from a higher figure, reports Caxton FX. The influence on the currency markets was minimal.

The figure is unlikely to have a major impact on Bank of England (BoE) thinking, as Richard Driver, analyst for Caxton FX, explained: “UK consumers will be disappointed. It is already a difficult time for most, and prices have risen by 0.2% on the month. Food prices saw the sharpest increase, which helped keep the annual figure at a two-and-a-half year high of 4.5% year on year.

“The MPC [monetary policy committee] is comfortable with these levels of inflation. We will need to see a surge up towards 5.0% for the MPC to feel any real pressure to act. If UK growth was stronger, the current high prices would almost certainly prompt a Bank of England rate rise, but as it is a premature hike could very easily push us back into recession,” he added.

“UK inflation risks certainly remain to the upside, but we would probably see [Mervyn] King and the MPC holding off on rates even if the figure breaches the 5.0% benchmark. In the absence of Andrew Sentance, the MPC doves are firmly in control. It will be very interesting to learn from the MPC minutes (released next Wednesday) whether Spencer Dale has jumped ship on the issue of raising rates. Martin Weale indicated in a speech yesterday that he remains hawkish.”

The market’s response is not what it could have been, as Driver concluded: “Rumours of a 4.3% figure sent sterling lower in the build up to the release, and sterling remains modestly down from where we started this morning. I see sterling coming off a little today and indeed this week. We have the key monthly UK retail sales figure released on Thursday, which is expected to show a 0.5% contraction after April’s bumper figure. Sentiment towards the UK economy remains very weak indeed, and this data has done nothing to bring BoE rate rise bets forward from 2012.”


Related reading

New consumer banking head for Citi Asia Pacific