Market Commentary for the UK CPI Announcement (17/01/24)

Author: Jamie Dutta, Global Market Analyst, Vantage Markets

Released: 17/01/24

The latest UK inflation figures didn’t paint an encouraging picture for either policymakers or the government as the disinflation trend stalled. The headline reading increased for the first time in nearly a year. Markets reined in the prospects of a first Bank of England rate cut in May while the pound rose. But price pressures are expected to cool through 2024.

The core reading, which strips volatile food and energy costs, remained steady above 5%. It was hoped that we would see a print below that psychological level which would have been the first time in nearly two years.

Crucially, services inflation which the MPC watch closely, increased by one-tenth to 6.4%. But this is still well below the bank’s own most recent November projections. Further cooler wage growth data released yesterday – the lowest since March last year – should see more progress in this important input.

Policymakers definitely won’t be able to declare victory over inflation with these figures. They will also have one eye on the March budget and a possible loosening of fiscal policy. Tax cuts could be announced by the Chancellor, as well as closer to a possible November general election. That would likely push out the timing of the first rate cut, though inflation is set to drop materially much closer to target by the summer as food and energy costs continue to retrace.

Sterling turned higher after selling off sharply yesterday on subdued risk sentiment and a stronger dollar. This year’s range still holds in cable as the market tries to figure out if it has got ahead of itself with regard to the aggressive rate cuts priced in over the coming year.

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