UK CPI to Tumble Sharply

Breathing a Sigh of Relief: UK Inflation Expected to Ease, but Challenges Remain

And breathe! Finally, both policymakers and millions of UK households will exhale a major sigh of relief as the country’s pigheadedly high inflation is set to get some relief. The run of seven consecutive months of double-digit CPI is likely to end tomorrow. In fact, the April headline print is predicted to decline dramatically, to around 8% after averaging above 10.4% since October last year.

This is almost entirely due to the dropping out of energy base effects after the spike in prices following the Russian invasion of Ukraine. This caused a sharp jump in Ofgem’s household energy price cap in April 2022 and misery to households up and down the country who have seen their energy bills surge. There may also be more relatively good news as food prices might have passed their peak too. This would match those in the euro zone and the downtrend seen in producer food price inflation.

A key issue for policymakers on the MPC will be still sticky core items, especially services. This was highlighted by today’s PMI data which again saw a tale of two economies with a widening divergence between weak manufacturing and the surging services sector. The growth spurt seen in the latter could potentially drive renewed inflationary pressures. Thursday’s Ofgem announcement about a significant cut in its household energy price cap in July will also be key for the inflation outlook.

Pound Under Renewed Pressure

Sterling dropped to a near one-month low earlier today against the dollar as markets are kept in thrall to the debt ceiling drama across the pond. But a cooler-than-expected CPI report tomorrow will also be seized upon by sellers. Markets currently fully expect another 25bp rate rise at the June Bank of England meeting and this report will be one more piece in the puzzle for policymakers. Will it be make-or-break for the pound? We do have another CPI report and wage data before then to also contend with, though bearish momentum in cable is picking up.

Written on 23/05/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

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