Economic preview: UK CPI inflation in focus
12:05, 17 January 2022
Inflation is the main focus in this week’s economic calendar as the UK reports on the consequences of price pressures in December after the Bank of England (BoE) surprised the markets and hiked rates by 0.15 percentage points to 0.25%.
It followed UK inflation hitting a 10-year high in November last year after the Consumer Price Index (CPI) rose by an annual 5.1%, up from 4.2% in October and well above the BoE’s inflation target of 2%.
Employment data will also be published this week – as well as retail sales and Markit Service PMI in the UK. It is anticipated that the latest figures will give investors and analysts an indication on the potential pace of policy tightening for the year ahead.
How will markets react to CPI data
Giles Coghlan, chief currency analyst at GCFX, gave Capital.com his thoughts on the possible effect this week’s CPI data might have on the markets.
“The fear of rising inflation prompted the BoE to hike rates by 15 bps in December. The main concern for the BoE was that rising wages would make inflation systemic. The CPI data out this week will be unlikely to impact market sentiment much,” he said.
“In December, the Bank of England put the rise in inflation down to rising pay and energy costs. Inflation is still expected to fall back in the second half of 2022. However, any surprise moves higher above 5.4% will raise expectations that the BoE will have to follow the Fed’s footsteps and be more aggressive in its pace of rate rises,” Coghlan added.
Capital.com also spoke to market analyst Craig Erlam at Oanda for his thoughts on the upcoming CPI data.
“The UK CPI data is certainly one of the highlights this week given how sensitive investors are to interest rates at the moment,” said Erlam. “With inflation already running well above target and constantly surpassing expectations, the risks are seemingly tilted to the upside on Wednesday. Whether this will have a significant impact on the pound and monetary policy will depend on how large the number is.
“It’s worth noting that markets are already pricing in quite an aggressive tightening cycle, compared with what we’ve experienced for quite some time. Four rate hikes are almost entirely priced in this year from the BoE so it will take something quite substantial to trigger something more aggressive that that. More attention may instead fall on the balance sheet, as we’re seeing with the Fed, but the central bank will be keen not to choke off the recovery in the process. It’s a fine balancing act and, as we’ve seen recently, it doesn’t take much to tip investors over the edge.”
Inflation data impact on the pound
Francesco Pesole, FX strategist at ING shared his view on how this week’s data might affect the pound.
“This week, a slew of important data releases in the UK should provide some extra support to the currency – although mostly in the crosses in our view, as we expect the dollar to stay bid as well. Tomorrow’s jobs data should keep drawing a quite robust picture, and Wednesday’s inflation report for December should show another marginal acceleration in the headline rate. That should offset the negative impact of weaker retail sales on Friday. We continue to expect EUR/GBP to slip below 0.8300 in the near term,” he said.
Pesole also noted that the good momentum enjoyed by the pound at the start of the year has not been dented by the recent political noise in the UK.
“Prime Minister Boris Johnson remains in a quite fragile position after receiving multiple calls to resign, even from within the Coservative party. Still, we think that even in the event of a change in leadership, the downside risks for the pound , which is currently being supported by aggressive Bank of England tightening expectations, should be contained,” he added.
UK labour market figures
Employment figures will be published on Tuesday ahead of inflation data on Wednesday – and will reveal how the Covid-19 variant Omicron has affected the jobs market in the UK.
The stats released this week should give the BoE the figures it needs to make decisions on what is next on the policy front – with the BoE governor Andrew Bailey also scheduled to speak on Wednesday.
However, if the Recruitment and Employment Confederation (REC) survey findings are anything to go by – which revealed this month that UK job vacancies grew at the slowest pace in eight months – then December’s figures may be disappointing.
However, the REC said that labour market conditions remained tight overall as many employers struggled to find staff.
“Employers in all sectors haven’t lost their appetite to hire, but many will be frustrated by the pressure these inflationary and competitive conditions, which are likely to continue for some time,” warned Claire Warnes, head of education and skills at consultants KPMG, which sponsors the survey.
Other economic events
Also this week, in Germanythe ZEW Economic Sentiment Index will be released on Tuesday - and at the end of the week, Eurozone consumer confidence figures will also follow.
Other key stats to look out for include NY Empire State manufacturing and housing sector data, Canada CPI inflation data, Australia Westpac consumer confidence figures and employment data, China’s PBoC interest rate decision – and the US weekly jobless claims and Philadelphia Fed Manufacturing Index data.
Summary of data releases 17- 21 January
Monday
China – GDP Q4 (YOY) and retail sales
Europe – CPI (inflation data)
US public holiday
Tuesday
Japan – BOJ interest rate decision
UK – Employment data and average earnings
Germany – ZEW economic sentiment
US – NY Empire State Manufacturing Index
Wednesday
- Australia – Westpac consumer confidence
- UK – CPI, RPI & PPI (inflation data)
- Canada – CPI (inflation data)
Thursday
- Australia – Employment data
- China – PBoC interest rate decision
- Europe – CPI (inflation data)
- US – Weekly jobless claims and Philadelphia Fed Manufacturing Index
Friday
- Australia – Markit PMI services & manufacturing
- UK – Retail sales and Markit Service PMI
- Canada – Retail sales
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