UK Inflation Stays Hot with an Annual Inflation Rate of 10.5%

It was another busy day ahead on the UK economic calendar. Following the wage growth and unemployment numbers on Tuesday, UK inflation was in the spotlight this morning.

In December, the annual inflation rate softened from 10.7% to 10.5% versus a forecasted 10.5%.

According to ONS,

• The Consumer Price Index including owner occupiers’ housing costs (CPIH) increased by 9.2% in the 12 months to December 2022 versus 9.3% in November.
• Housing and household services (electricity, gas, and other fuels) and food & non-alcoholic beverages were the largest contributors.
• The UK annual inflation rate softened from 10.7% to 10.5% in December.
• Transport (particularly motor fuels), clothing & footwear, and recreation & culture had the largest downward contributions in the CPIH and CPI annual inflation rates between November and December.
• However, restaurants & hotels and food & non-alcoholic beverages made the largest upward contributions.

While the latest numbers support the consensus that inflation peaked in October (CPIH 9.6%), the decline was modest, suggesting that the Bank of England has more work to do. Coupled with the November wage growth numbers, the markets will likely bet on the BoE maintaining an aggressive policy outlook to bring inflation to target.

GBP/USD Price Action

Ahead of the inflation report, the GBP/USD fell to a low of $1.22552 before rising to a high of $1.22965.

However, the GBP/USD responded to the UK CPI report, rising to a high of $1.23204.

At the time of writing, the Pound was up 0.19% to $1.23106.

Up Next

With no other stats from the UK to consider, investors should also monitor Monetary Policy Committee member commentary. With no members speaking today, chatter with the media could move the dial.

On the geopolitical front, Brexit remains another curveball for investors, with the Northern Ireland Protocol and the December auto-expiry of thousands of EU-era laws causing political friction. Another Brexit rebellion could refuel political instability, a negative for the Pound.

Later in the day, the US economic calendar will provide further direction. Wholesale inflation, retail sales, and industrial production are in focus. Barring dire industrial production numbers, wholesale inflation and retail sales will likely have more impact.

A pickup in wholesale inflationary pressure and a slide in retail sales would be a risk-off combination.

Beyond the economic indicators, investors should also monitor FOMC member commentary. However, members would need to talk about a 50-basis point interest rate hike or a pause on lifting rates to move the dial.