UK Producer Prices Soften to Ease BoE Monetary Policy Pressure

It was a busy morning on the UK economic calendar. UK Producer Prices for December were in the spotlight. Inflation and wage growth remain the key focal points for the Bank of England. Despite a weak macroeconomic environment, the BoE remains resolute in bringing inflation to target.

The Producer Price Index Input increased 16.5% year-over-year in December versus 19.2% in November. The Producer Price Index Output rose 14.7% year-over-year, down from 17.5% in November. Economists forecast increases of 18.0% and 16.4%, respectively.

According to ONS,

• Service producer prices increased by 5.2% in the year to Q4 2022, down from a record high of 6.2% in the year to Q3 2022.
• The annual rate of input PPI has slowed for the sixth consecutive month, while the rate of output PPI has softened for the fifth consecutive month.
• Food products provided the largest upward contribution to the output annual rate in December 2022, at 4.11 percentage points.
• Metals and non-metallic mineral products had the largest upward contribution to the annual input inflation rate.

The latest inflation components followed the prelim January private sector PMI numbers that raised red flags.

On Tuesday, the UK Composite PMI survey highlighted a further decline in cost pressures, which eased back to their lowest since April 2021. However, firms cited wage pressures as the key driver behind rising business expenses, which may leave the BoE hawkish near term.

Average prices charged increased sharply in January, with firms attempting to pass on the upward trend in staffing costs. With wage growth being the key contributor, the softer PPI numbers may not be enough to ease pressure on the BoE. More aggressive interest rate hikes would have a more detrimental impact on the UK economy.

GBP/USD Price Reaction to UK Producer Prices

Ahead of today’s wholesale inflation numbers, the GBP/USD rose to an early high of $1.23394 before falling to a low of $1.23119.

In response to the Producer Price Index report, the GBP/USD fell to a low of $1.23178 before steadying.

At the time of writing, the GBP/USD was down 0.11% to $1.23264.

Up Next

While inflation was back in the spotlight, no Monetary Policy Committee Members are speaking today, leaving investors to monitor chatter with the media.

It is a quiet day ahead on the US economic calendar. There are no US economic indicators for investors to consider, leaving corporate earnings to influence market risk sentiment.

Boeing (BA), IBM (IBM), and Tesla (TSLA) are among the big names releasing earnings results today.

However, there are also FOMC members speaking today to influence, with the Fed having entered the blackout period on Saturday.