UK CPI inflation expected to accelerate in October, core rate to ease slightly
- United Kingdom’s Office for National Statistics is set to publish the CPI report on Wednesday.
- The annual UK headline CPI inflation is expected to rise in October, with the core figure easing slightly.
- The UK CPI data could signal a BoE December interest-rate cut pause, fuelling a Pound Sterling sell-off.
The United Kingdom’s (UK) Consumer Price Index (CPI) data for October will be published by the Office for National Statistics (ONS) on Wednesday at 07:00 GMT.
The UK CPI inflation report could provide fresh cues on the Bank of England’s (BoE) path forward on interest rates, which will likely have a strong bearing on the Pound Sterling.
What to expect from the next UK inflation report?
The UK Consumer Price Index is set to rise at an annual pace of 2.2% in October after increasing by 1.7% in September, moving back above the BoE’s 2.0% target.
The core CPI inflation is expected to ease slightly to 3.1% YoY in October, compared with a 3.2% reading reported in September.
According to a Bloomberg survey of economists, official data is expected to show that service inflation eased slightly to 4.8% in October from 4.9% in the prior month.
The BoE projected the annual headline CPI to be 2.2% and the services CPI to be 5.0% in October.
Meanwhile, the British monthly CPI is seen rising 0.5% in the same period, compared to the previous reading of 0%.
Previewing the UK inflation data, Societe Generale analysts noted: “We expect base effects and higher utility prices to push headline inflation back above its 2.0% target in October to 2.2% year-over-year (YoY), up from 1.7% YoY in September. More importantly, we see services inflation rising by 0.1 percentage point (pp) to 5% YoY, although the risks are tilted to the downside.”
How will the UK Consumer Price Index report affect GBP/USD?
Following the November 7 decision to cut rates by 25 basis points (bps) to 4.75%, the BoE retained its cautious language on future interest rate cuts. In its policy statement, the central bank reiterated that it would need to stay "restrictive for sufficiently long" to return inflation sustainably to the 2.0% target.
The BoE predicted that the UK Finance Minister Rachel Reeves' Autumn Budget 2024 will increase the GDP size while adding to the inflationary pressures.
Testifying before the UK Parliament’s Treasury Select Committee (TSC) on Tuesday, Governor Andrew Bailey said that reiterated that the Labour government's tax rises reinforce the central bank’s gradual approach to easing interest rates,
Against this backdrop, the UK CPI data holds the key to gauging whether the BoE will pause its easing trajectory following its second rate cut since 2020 earlier this month.
A hotter-than-expected headline and core inflation data would ramp up bets for a BoE pause, lifting the Pound Sterling. In this case, GBP/USD could initiate a sustained recovery from six-week troughs. On the other hand, softer-than-expected inflation readings could exacerbate the pain in the Pound Sterling, smashing the GBP/USD toward 1.2500.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD holds its recovery mode in the UK CPI data release countdown. However, the 14-day Relative Strength Index (RSI) stays below 50, suggesting that downside risks remain intact. Further, the 21-day Simple Moving Average (SMA) looks to cut the 200-day SMA from above, representing an impending Death Cross on the daily time frame and adding credence to the bearish potential.”
Dhwani adds: “The pair could extend the recovery toward 1.2750 psychological resistance, above which the 200-day SMA at 1.2820 will be challenged. The next upside target is seen at the 21-day SMA at 1.2858. Conversely, the immediate support is seen at the multi-month lows of 1.2597, below which the 1.2500 round level 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 Nov 20, 2024 07:00
Frequency: Monthly
Consensus: 2.2%
Previous: 1.7%
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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