Today, the Office of National Statistics (ONS) released a series of data including the CPI, House Price Index, PPI, and RPI. However, traders were paying a closer attention to the CPI numbers for December.
In December, the agency released inflation numbers of 3.1%. This was a shock to policy makers and traders. In fact, the BoE governor Mark Carney was forced to write a detailed letter to the exchequer treasure to explain the sudden change.
As such, traders were anticipating today’s numbers because, a continued rise in inflation would have lead the BoE to intervene.
Today, the organization released the headline inflation of 3.0% a sign that prices eased in December. The drop in inflation was caused by a drop in prices of airfares and recreational materials like toys and games. This drop was offset by a sudden increase in tobacco prices as a result of additional duties that accompanied the previous budget.
Also, the lower inflation was offset by the rise of food items which can partly be attributed to higher energy prices. In future readings, this is likely to continue as oil price is currently rising. Brent is currently trading above $70 a barrel.
Today’s readings also showed that core inflation reduced by 2.5% which was more than expected while housing price index fell to 5.1% from 5.4%.
As a result, the pound fell against the major peers as shown below.
The FTSE fell by 14 bps as investors interpreted the low inflation. They were also focused on the bankruptcy of construction firm Carillion.
Remember, in the October meeting, the BoE raised interest rates by 50 basis points and pointed to no further hikes this year.
However, last month’s data made markets anticipate that the committee would revise this and may enact at least two hikes this year. As I have written before, the role of the central bankers is to ensure financial stability and maintain prices. As such, in a period of rising inflation, the central bank is tasked with normalizing by increasing interest rates.
The reaction among observers was mixed. Some argued that the slip in inflation was an indication that it had peaked as the pound seems to have stabilized. Analysts at Danske Bank noted that inflation is now headed lower.
Others like Dennis Di Jong of UFX noted that with the pound back to the highest level before Brexit, and with optimism rising, he expected the inflation to fall closer to the Bank of England’s 2% this year. He also argued that the key challenge to policy makers is the low wage growth. This means that people will take longer to see the benefits of the low inflation.
Several commentators like Richard Lim of Retail Economics, Nancy Cutin of Close Brothers Asset Management, and Rupert Harrison who is a former official at the treasury shared the same sentiments.
This means that the pound rally we have been seeing could slow as hopes for a rate hike dims. Remember, traders like to own currencies that have some yielding power.
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