UK CPI meets expectations pushing back the need for a rate cut in September

The latest UK CPI data released on Wednesday morning showed consumer prices remained unchanged at 2.2% in August as widely forecasted. Meanwhile, core CPI which excludes volatile prices like food, alcohol and energy, rose slightly from 3.3% to 3.6% but the rise was already priced in. It is not uncommon to see inflation pick up in the summer months as consumers usually spend more.

ONS chief Economist Grant Fitzner said “the main movements came from air fares, in particular to European destinations, which showed a large monthly rise, following a fall this time last year. This was offset by lower prices at the pump as well as falling costs at restaurants and hotels. Also, the prices of shop bought alcohol fell slightly this month but rose at the same time last year.”

Looking down at the breakdown, the picture remains slightly mixed, with services inflation still being the sticky area as domestic price pressures remain. The chart below evidences how goods prices continue to decline, with services leading the rise.

The fact the data came in line with expectations means it will have little or no impact on the BoE rate decision on Thursday, with markets currently pricing in a 75% chance of no change. A rate cut would likely come as a surprise as of now, even if the FOMC does indeed cut rates this evening as widely expected, which would likely weigh on UK assets.

For now, GBP/USD continues to point higher as markets price in more easing from the Fed than the BoE in the next 12 months. The FOMC meeting this evening could play into this dynamic even further if markets perceive Jerome Powell to be dovish with his forward guidance, despite the magnitude of the cut. If so, the pair could attempt to breach this week’s high at 1.3229 before aiming for the two-and-a-half-year high at 1.3268. 

GBP/USD daily chart

Past performance is not a reliable indicator of future results.

Meanwhile, the FTSE 100 has seen some indecision creep in as the rise in core CPI does weaken the BoE’s ability to cut rates, even if the rise was forecasted. The UK index has been flattening out in recent months due to the lack of commitment from Governor Bailey to cutting rates, but the bias could resume higher in coming weeks as markets get more clues about the future path of rates. 

FTSE 100 daily chart

Past performance is not a reliable indicator of future results.