UK CPI, labour market data keep BoE on track for December hike

Following on from yesterday’s robust labour market print, today’s inflation report makes it 2 out of 2 data releases in terms of confirming that the Bank of England should hike rates as early as December. Not only did CPI massively outstrip expectations to print at its highest 12-month rate since December 2011, but the month-on-month change saw the pace of price increases reach a high not seen since April 1993.

While a large proportion of the increase in price growth can be attributed to the Ofgem energy price cap adjustment, which rose 12.2% for 15 million households in October, price pressures remained broad based and not just isolated to housing, water, electricity and other fuels. While utility price inflation rose from 2.8% to 22.9% YoY, food inflation also rose (from 0.9% to 1.3% YoY) along with fuel inflation from 17.8% to 21.5% YoY. The MPC can’t point to one-off energy price adjustments to disregard today’s reading, however, as core measures also rose and outstripped expectations. Core CPI printed at 3.4% YoY, above the 3.1% expectation, while core goods inflation also rose from 3.1% to 3.5%.

While today’s data exceeded the consensus estimate from economists, it is broadly in line with the BoE’s projections, which envisage CPI peaking at 5% in April 2022 when Ofgem adjusts its price cap again.

Even though the Bank has already adjusted for such an inflation path, the fact that price growth remains so aggressive at a time when other economic indicators start to show the economy remains on track means the BoE are still on track to continue tightening policy at the margin. As every piece of data confirms this in the run-up to December’s meeting, the pound is enjoying another wave of support. However, tentative rallies aren’t surprising given how bullish GBP traders got burnt by the BoE at November’s meeting. Should economic activity data show momentum in the economy is picking up, with retail sales data due out on Friday, we think GBPUSD will be poised to return to the 1.35 handle by month-end as markets begin to fully price in BoE expectations yet again.

Sterling traders remain sceptical in pricing in BoE expectations fully after November’s shock decision, but each piece of confirming data sends the pound to the top of the G10 currency basket

Author: Simon Harvey, FX Market Analyst

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