Pound Sterling Strengthens as UK Inflation Jumps to 2.3%

November 20, 2024 - Written by Frank Davies

STORY LINK Pound Sterling Strengthens as UK Inflation Jumps to 2.3%

UK inflation is bouncing back, and Wednesday’s readings were higher than expected.

Sterling is up around +0.25% against the euro.

The data is not likely to lead to major changes in BoE policy, but it does put a December cut in doubt.

Markets have entered a post-election pause ahead of the US holiday season, which starts on November 28th with Thanksgiving. The USD has finally pulled back slightly after a relentless rally from the September low, but it is unlikely to fall far given the backdrop of high yields and a Trump presidency. Markets are awaiting Trump’s appointment of Treasury Secretary which could be a major driver for bonds, the USD and Bitcoin.

Inflation has picked up in the US over recent months with the last three Core CPI readings coming in at 0.3%. The UK could be following a similar trajectory as Wednesday’s CPI release revealed sticky services inflation and Core CPI at 3.3%, and headline CPI at 2.3%. This has put a December cut from the BoE in doubt and boosted the pound. EURGBP has slid –0.25% to 0.833.

UK Inflation Hotter Than Expected

Headline CPI was expected to rise from 1.7% to 2.2%, which was already a hefty jump. However, it beat even this estimate with a reading of 2.3%. Core CPI was even hotter with a rise from 3.2% to 3.3% when a drop to 3.1% was expected.

This was bad news for the UK consumer and bad news for the BoE’s plans to cut rates. Inflation is still too high and there are fears it may start trending higher again.

Services inflation remains near 5%, which is in line with the BoE’s own forecasts, but the concern is that it stays there for an extended period. Its persistence is problematic, and while there is a general expectation for it to drop next year, economists often get forecasts wrong. Here’s ING’s view:

“We, like the BoE, expect services inflation to bounce around 5% for the next four months or so before turning more noticeably lower in the second quarter. At the same time, headline inflation could get pretty close to 3% in January, albeit mainly because of energy.”

The BoE are well aware CPI is likely to creep higher and warned several months ago that it was near a trough and could rebound. Much of this is due to how it is calculated as it is compared to readings one year ago. When compared to strong figures, current inflation will be low. When compared to weaker figures, current inflation is either flat or higher. The latter is happening now.

There is no suggestion inflation is about to ramp higher like it did in years past and the BoE will not be overly concerned with Wednesday’s release. Here’s ING with some thoughts why:

“UK services inflation was a tad hotter than the economist consensus had expected in October. But at 5%, it’s only fractionally higher than in September ...when we drill down into the details, you discover that much of the recent stickiness is in categories that the Bank seems to deem less important/less indicative of inflation “persistence”.”

So, while it might give the BoE pause for thought on a December cut, as long as disinflationary trends stay broadly intact, there should be some cuts coming early next year. This is perhaps the reason for the mild reaction in the pound. GBPUSD is flat on Wednesday, although both the pound and USD are relatively strong against other G7 currencies. EURGBP is lower by around –0.25%. Even still, that’s hardly reflecting a major shift in expectation on easing. Markets expect around 3 more cuts early next year.

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TAGS: Pound Sterling Forecasts