UK Inflation Rate Stays at 8.7% to Keep the BoE Under Pressure

It is a busy Wednesday session on the global economic calendar. This morning, UK inflation numbers garnered plenty of interest as the markets look ahead to tomorrow’s Bank of England monetary policy decision.

After the unexpected acceleration in wage growth, UK inflation needed to soften markedly to ease pressure on the Bank of England.

However, the UK annual inflation rate held steady at 8.7% in May versus a forecasted 8.4%.

According to the Office for National Statistics,

• The Consumer Price Index, including owner-occupier’s housing costs (CPIH), increased by 7.9% in the 12 months to May, up from 7.8% in April.
• Falling motor fuel prices had the largest negative contribution to the annual CPIH and CPI rates.
• Food and non-alcoholic beverage prices increased in May 2023 but less than in May 2022.
• Recreation and culture price increases (6.4% to 6.8%) offset the downward effect of food and non-alcoholic beverage prices (19.1% to 18.4%).
• The annual inflation rate for transport eased from 1.6% to 1.3%, with motor fuel prices a drag.
• In the year to May 2023, motor fuel prices declined by 13.1% compared with an 8.9% fall in April. However, airfare and second-hand car price increases largely offset the effects of motor fuel prices on transport inflation.
• Month-on-month, the consumer price index increased by 0.7% in May versus +1.2% in April. Economists forecast a 0.5% increase.
• However, the Producer Price Index Input fell by 1.5% in May versus a 0.1% increase in April. Economists forecast a 0.5% decline.

The latest headline inflation figure will likely alarm the Bank of England doves looking to hit the brakes. Wage growth and sticky inflation will also put the UK economy at a greater risk of recession should the Bank of England respond to the latest CPI numbers with a more aggressive policy move on Thursday. The doves may take some comfort in the fall in the PPI Input.

GBP to USD Reaction to UK Inflation Numbers

Ahead of the UK CPI Report, the GBP to USD fell to a pre-report low of $1.27543 before rising to a high of $1.27683.

However, in response to the CPI Report, the GBP to USD surged to a post-Report session high of $1.28025 before easing back.

This morning, the GBP/USD was up 0.03% to $1.27678.

Next Up

With inflation in the spotlight, investors should track Bank of England commentary for a reaction. However, no Monetary Policy Committee members on the calendar to speak, leaving chatter with the media to move the dial.

Looking ahead to the US session, it is another quiet day on the US economic calendar. There are no US economic indicators to influence. The lack of economic indicators will leave Fed Chair Powell and FOMC member commentary to move the dial.

Fed Chair Powell will give the first day of testimony. While the FOMC press conference was only last week, investors should look for any deviation from the script.

The anticipation of Fed Chair Powell’s testimony on interest rate expectations was telling. According to the CME FedWatch Tool, the probability of a 25-basis point July rate hike stood at 76.9% on Tuesday versus 74.4% on Friday. The chances of the Fed lifting the Fed Funds Rate to 5.75% in September increased from 8.9% to 11.5%.