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UK CPI Inflation Mixed

UK CPI Inflation Mixed, FP Markets

Earlier this morning, UK inflation numbers hit the wires.

  • The Consumer Prices Index including owner occupiers’ housing costs (CPIH), which is essentially an extension to the Consumer Prices Index (CPI), slowed to 3.8% in the twelve months to February, down from January’s reading of 4.2%.
  • The CPI year-on-year rate saw consumer prices cool to 3.4% in February from 4.0% in January (median estimate: 3.5%), while month-on-month CPI rose 0.6% in February from -0.6% in January (median estimate: 0.7%).
  • Underlying inflation (core) eased to 4.5% on a year-on-year basis for February, down from 5.1% in January (median estimate: 4.6%), whilst the month-on-month rate increased to 0.6% in February from -0.9% in January (median estimate: 0.7%).
  • Services inflation remains elevated at 6.1%, though slowed from 6.5%. Although the number came in above economists’ expectations, this remains aligned with the Bank of England’s (BoE) projections.

While an immediate sell-off in sterling was seen (all of ten seconds), pre-announcement levels were swiftly retested, and GBP is trading largely unchanged against its US counterpart as of the time of writing. This was a difficult release to trade. As you can see above, the actual/forecast deviation was not sizeable for year-on-year and month-on-month headline and core readings (0.1% across the board), and month-on-month rates actually increased from prior values. On top of this, although not observed above, some upside deviations in the Retail Prices Index (RPI) and the Producer Price Index (PPI) emerged. To trigger notable movement on the back of the UK inflation data, we often need more meaningful (and broader) variations.

UK CPI Inflation Mixed, FP MarketsDigging deeper into the report provided by the Office for National Statistics (ONS), downward contributions were seen in nine divisions to the monthly change for both CPIH and CPI annual rates, with the largest being in food, restaurants and cafes. The greatest upward contributions were seen in housing and household services, along with motor fuels.

UK CPI Inflation Mixed, FP MarketsIn terms of rate pricing, according to the OIS curve, 67bps of easing is priced in for the year (just under three 25bp rate cuts), with a 25bp cut fully priced in for August (-27bps). This is quite the difference compared to the beginning of the year when investors forecast five 25bp cuts for this year!

While slowing headline and core inflation will be welcomed news at the BoE, it was not sufficient to warrant much of a dovish repricing. The BoE will also be in the limelight tomorrow at 12:00 pm GMT and is expected to leave the Bank Rate at its 16-year high of 5.25%, with only a 3.0% probability that the central bank will cut rates.

  • UK CPI Inflation Mixed, FP Markets
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