UK CPI, Pound Sterling Analysis

• Headline and core measures of inflation surprise to the upside
• Temporary price pressures unlikely to challenge the Bank of England’s resolve
• Pound sterling catches a bid after hotter CPI prints, US retail sales and Fed speak up next
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Headline and Core Measures of Inflation Surprise to the Upside

The headline measure of inflation rose from 3.9% to 4) in the month of December while the core measure (inflation excluding volatile items like food and energy) remained at 5.1% - beating the 4.9% forecast.

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Taking a more granular look at some of the main contributors to the year-on-year rise in inflation for December, we can see that alcohol and tobacco provided the largest positive impact to the index while food and non-alcoholic beverages saw the largest drop off. Alcohol and tobacco attracted higher prices due to the rise in tobacco duty announced by the UK government in the Autumn Statement.

Source: Office for National Statistics (ONS), prepared by Richard Snow

Temporary Price Pressure Unlikely to Challenge the Bank of England’s Resolve

The hotter December inflation prints do not signal an overall rise in the component categories that make up headline and core CPI figures - which points to continued progress in getting inflation down to 2%. Energy costs have been plummeting as fuel and gas prices have long been in decline, although, a temporary rise in energy prices is possible if security concerns along the Red Sea shipping route lead to delays. For, example, just yesterday Shell announced it will halt all shipping via the Red Sea in response to the recent Houthi attacks on shipping vessels.

On the whole, the story remains the same. The UK is expected to witness further progress in the fight against inflation with services inflation remaining a concern for the Bank of England. The red line in the chart below reveals a flattening out of not only services inflation but also headline and core measures as a whole. Yesterday, UK average earnings figures declined but remain fairly elevated.

Source: Refinitiv Datastream, LSEG - prepared by Richard Snow

Immediate Market Response: GBP Pairs, FTSE

The pound sterling rose in response to the elevated inflation numbers in what has been a UK-focused week as far as the data is concerned. The FTSE opened lower but when viewed in context, the index has come under pressure over the last few trading sessions as global indices taper off. Geopolitical tensions have been on the rise (Red Sea saga) and markets are beginning to cool expectations around interest rate cuts for 2024 – removing some of that bullish support for riskier equity markets. Next up is US retail sales data for the festive December period, followed by a number of Fed speakers.

GBP/USD, GBP/JPY, EUR/GBP and FTSE 5-Minute Charts

Source: TradingView, prepared by Richard Snow

https://www.dailyfx.com/news/uk-breaking-news-cpi-surprises-to-the-upside-lifts-sterling-20240117.html