UK Inflation Defies Gravity with an Inflation Rate of 10.1% in March

It was a busy morning on the UK economic calendar. The UK CPI Report for March was in focus this morning. Following hotter-than-expected wage growth figures, sticky inflation could fuel bets of a 50-basis point BoE interest rate hike in May.

The UK annual inflation rate softened from 10.4% to 10.1% in March. Economists forecast a rate of 9.8%.

According to the Office for National Statistics,

• The Consumer Prices Index, including owner occupiers’ housing costs (CPIH), increased by 8.9% in the 12 months to March 2023, down from 9.2% in February.
• Housing and household services (electricity, gas, and other fuels) and food & non-alcoholic beverages were the main contributors.
• In March, the CPIH increased by 0.7% compared with 0.9% in March 2022, with the CPI up 0.8%. The CPI rose by 1.1% in March 2022.
• Falling prices for motor fuels and housing & household services (liquid fuels) partially offset upward contributions from food and recreation & culture.

Today’s inflation numbers could force the Bank of England into a more hawkish policy stance. The combined effect of sustained wage growth and elevated inflation may force the doves to reconsider their current positions.

An unexpected rise in the PPI Input Index also raises the prospect of a more hawkish BoE. The PPI Input Index increased by 0.2% in March versus a forecasted 0.3% decline.

Elevated inflation and the need for more aggressive Bank of England policy moves would likely impact the UK economy. Sentiment toward the UK economy had improved ahead of this week’s wage growth and inflation figures.

GBP/USD Reaction to the UK CPI Report

Ahead of the CPI Report, the GBP/USD rose to an early high of $1.24346 before falling to a pre-stat and session low of $1.24099.

However, in response to the CPI Report, the GBP/USD surged from $1.24121 to a post-stat and session high of $1.24436.

This morning, the GBP/USD was down 0.01% to $1.24241.

Next Up

After the UK Labour Market Overview (Tues) and inflation numbers, investors should consider Bank of England chatter. Monetary Policy Committee member Catherine Mann is on the calendar to speak today. However, investors should also monitor comments to the media.

Looking ahead to the US session, it is a quiet day on the US economic calendar. There are no US economic indicators to influence. The lack of stats will leave Fed chatter on monetary policy and the US economy to move the dial.

We expect increased sensitivity to FOMC member commentary as the markets respond to guidance beyond May.