UK CPI set to grow below 2% target in September, core inflation to remain high
- United Kingdom’s Office for National Statistics will release the CPI report on Wednesday.
- The annual UK headline and core inflation are expected to ease in September.
- The UK CPI data could seal in a BoE November interest-rate cut, a scenario that would weigh on Pound Sterling.
The United Kingdom’s (UK) Office for National Statistics (ONS) will release the highly anticipated Consumer Price Index (CPI) data for September on Wednesday at 06:00 GMT.
The UK CPI inflation report could affirm expectations of 25 basis points (bps) interest-rate cut by the Bank of England (BoE) in November, injecting a fresh bout of volatility into the Pound Sterling.
What to expect from the next UK inflation report?
The UK annual Consumer Price Index is likely to increase by 1.9% in September, sharply slowing down from August’s 2.2% growth while moving back below the BoE’s 2.0% target.
The core CPI inflation is set to ease to 3.4% YoY in September from 3.6% in August.
Official data is expected to show that services inflation fell to 5.2% in September from 5.6% the prior month, according to a Bloomberg survey of economists.
The BoE projected the annual headline CPI at 2.1% and services CPI at 5.5% for September.
Meanwhile, the British monthly CPI is seen rising 0.2% in the same period, as against the previous increase of 0.3%.
Previewing the UK inflation data, TD Securities (TDS) analysts noted: “We look for UK inflation to continue its steady march downward. But rapidly falling energy prices still heavily distort the headline number, and services inflation is likely to remain above 5.0% YoY (TDS: 5.2%, mkt: 5.3%), leaving core well above a range the MPC is comfortable with.”
“Hotel and airfare prices remain key sources of volatility in the month,” the TDS analysts said.
How will the UK Consumer Price Index report affect GBP/USD?
Heading into the UK CPI event risk, Pound Sterling traders weigh in on the odds of the BoE rate cut next month, especially after the contradictory messages from BoE policymakers earlier in October.
BoE Chief Economist Huw Pill said that there is “ample reason for caution in assessing the dissipation of inflation persistence,” adding that the “need for such caution points to a gradual withdrawal of monetary policy restriction.” Just a day before Pill’s appearance, Governor Andrew Bailey noted that the UK central bank “could become a bit more activist on rate cuts if there’s further good news on inflation.”
Therefore, the UK CPI data could help confirm whether the BoE will resume its rate-cutting cycle after pausing in September.
An upside surprise to the headline and core inflation data would likely douse the market’s expectations of a rate cut next month, lifting the Pound Sterling. In such a case, GBP/USD could stage a decisive comeback from multi-week troughs.
Conversely, the GBP/USD downtrend could extend if the UK CPI readings meet forecasts or come in softer-than-expectations. Thus, the UK central bank’s progress on disinflation could confirm another rate reduction in November, throwing the British Pound under the bus.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD has entered a downside consolidative mode in the countdown to the UK CPI data release. The 14-day Relative Strength Index (RSI) holds near 40, suggesting that more losses remain in the offing.”
Dhwani adds: “The pair needs to find acceptance above the 50-day Simple Moving Average (SMA) at 1.3115 on a daily closing basis to negate the near-term bearish bias. The next upside targets are seen at the October 4 high at 1.3175 and the 21-day SMA at 1.3215. Alternatively, the immediate support is aligned at the 100-day SMA at 1.2950, below which the March 8 high of 1.2894 could be tested.”
Economic Indicator
Consumer Price Index (YoY)
The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.
Read more.Next release: Wed Oct 16, 2024 06:00
Frequency: Monthly
Consensus: 1.9%
Previous: 2.2%
Source: Office for National Statistics
The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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