UK CPI inflation expected to edge up slightly in December, core rate to ease
- United Kingdom’s Office for National Statistics will release the December CPI data on Wednesday.
- The annual UK headline CPI inflation is set to rise in December, with the core figure cooling slightly.
- The UK CPI report will likely rock the Pound Sterling amid the BoE’s cautious policy approach.
The United Kingdom’s (UK) Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) data for December on Wednesday at 07:00 GMT.
The UK CPI inflation report could significantly impact the direction of the Bank of England’s (BoE) interest rates and the Pound Sterling (GBP) amid the persistent turmoil in the global bond market.
What to expect from the next UK inflation report?
The UK Consumer Price Index is expected to increase 2.7% year-over-year (YoY) in December, following a 2.6% growth in November, moving further away from the BoE’s 2.0% target.
Core CPI inflation, which excludes energy, food, alcohol and tobacco, will likely edge a tad lower to 3.4% YoY in December, compared to the 3.5% print reported in November.
According to a Bloomberg survey of economists, official data is expected to show that service inflation fell to 4.8% in December after remaining at 5% in the prior month.
The BoE forecast the annual headline CPI to be 2.5% and the services CPI to be 4.7% for December.
Meanwhile, the British monthly CPI is seen rising 0.4% in the same period, as against the previous growth of 0.1%.
Previewing the UK inflation data, TD Securities analysts noted: “We look for the headline of 2.7% but the more important core and services are likely to see decelerations, especially services, which we expect to fall from 5.0% YoY in November. That said, there remains big uncertainty about airfares, which were likely very weak in the month on account of the survey data.”
How will the UK Consumer Price Index report affect GBP/USD?
The BoE policymakers wrapped up 2024 with a decision to leave the benchmark policy rate unchanged at 4.75% in its December meeting after UK inflation climbed to an eight-month high.
In a dovish tilt, the voting composition was more divided than expected. Three members of the Monetary Policy Committee (MPC) voted to reduce rates, while six favoured a hold. Amidst weak economic prospects, BoE Governor Andrew Bailey said: “We think a gradual approach to future interest-rate cuts remains right. But with heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”
The ongoing rout in the UK bond market indicates the bleak economic outlook and increased inflationary concerns in the United States (US) President-elect Donald Trump 2.0 era.
In light of these factors, the stakes are high heading into the December UK CPI data release, as it could alter the market’s pricing of the BoE’s path forward on interest rates.
The hotter-than-expected headline and core inflation data will likely reaffirm the BoE’s gradual easing stance, providing the much-needed respite to the Pound Sterling. In this case, GBP/USD could see a decent recovery from over a year’s low. Conversely, softer-than-expected inflation readings could call for aggressive BoE rate cuts amid a fragile economic situation, smashing the GBP/USD toward sub-1.2000 levels.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD is heavily oversold on the daily time frame ahead of the UK CPI data release, with the 14-day Relative Strength Index (RSI) holding below 30. Therefore, the pair appears primed for a brief recovery in the near term.”
Dhwani adds: “The pair could initiate a meaningful recovery on acceptance above the 1.2300 round level, above which the January 9 high of 1.2367 will be tested. The next upside target is seen at the 21-day Simple Moving Average (SMA) at 1.2462. On the flip side, the immediate support is seen at the 14-month low of 1.2100, below which the 1.2050 psychological barrier will come into play.”
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 Jan 15, 2025 07:00
Frequency: Monthly
Consensus: 2.7%
Previous: 2.6%
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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