UK Inflation Slows to 2.8% YoY in February
- United Kingdom’s annual CPI rose 2.8% in February vs. 2.9% estimate.
- British inflation jumped to 0.4% mom in February vs. 0.5% forecast.
- GBP/USD holds losses below 1.2950 after UK CPI inflation data.
The United kingdom’s Consumer Price Index (CPI) increased 2.8% year-over-year in
February,following January’s 3.0% increase, according to official data released
Wednesday.
Economists had forecast a 2.9% rise. The figure remains above the Bank of England’s 2% target.
Core CPI, which excludes volatile food and energy items, increased at an annual rate of
3.5% in the same period,compared to January’s 3.7% increase, and below the market
forecast of 3.6%.
Services inflation remained at 5% year-over-year in February.
Monthly UK CPI inflation rebounded to 0.4% in february from -0.1% in January,while
economists estimated 0.5%.
GBP/USD Reaction to the UK CPI Inflation Data
Table of Contents
The UK CPI data put downward pressure on the Pound sterling, sending GBP/USD 0.15% lower
on the day,below 1.2950.
The following section was published earlier as a preview of the UK Consumer Price
Index (CPI) inflation data.
-
the United Kingdom’s Office for National Statistics will release the February CPI
data on Wednesday. -
The annual UK headline and core CPI inflation are set to ease slightly in
February. -
The UK CPI data could impact the direction of the Pound Sterling and the BoE’s
interest rates.
The United Kingdom’s (UK) Office for National Statistics (ONS) will publish the Consumer
Price Index (CPI) data for February on Wednesday.
The Pound Sterling (GBP) could experience volatility following the UK CPI inflation
report,as it is likely to alter market expectations for the Bank of England’s (BoE)
future interest rate cuts.
What to Expect From the Next UK Inflation report
The UK Consumer Price Index is expected to increase by 2.9% year-over-year in February,
following a 3% growth in January.
The reading is expected to remain distant from the BoE’s 2.0% target.
Core CPI inflation, which excludes energy, food, alcohol, and tobacco prices, is expected
to be slightly lower at 3.6% year-over-year in February, down from January’s 3.7%.
Official data is expected to show that service inflation will likely ease to 4.9% in
February after jumping to 5% in January.
Simultaneously occurring, the British monthly CPI is expected to rise by 0.5% in the same period,
compared to the previous decline of 0.1%.
Inflation is slated to cool slightly,with headline dropping to 2.8% (consensus: 2.9%;
prior: 3.0%). We also expect core and services to come in lower, at 3.6% YoY (prior:
3.7% YoY and 4.9% YoY (prior: 5.0% YoY),respectively. While all these numbers are
softer than in Jan, the deceleration remains too slow for the Monetary Policy
Committee’s (MPC) preferences.
How Will the UK Consumer Price Index Report Affect GBP/USD?
At its monetary policy meeting earlier this month, the Bank of England (BoE) held interest
rates, warranting caution against expectations that they would cut rates over its next few
meetings amid heightened uncertainty over the UK and global economies.
However, the 8-1 vote split to stay on hold was a hawkish surprise and triggered an
upward adjustment to UK rate expectations. The swaps market continues to price in 50
bps of easing over the next 12 months but has fully priced out any odds of an
additional 25 bps cut following the less dovish MPC vote split.
Thus, an upside surprise to the headline and core inflation data is needed to reaffirm
the BoE’s prudent approach and increased bets for fewer rate cuts this year.In such a
case, the Pound Sterling uptrend is expected to resume, lifting GBP/USD back toward a
certain level. Conversely, softer-than-expected inflation readings will likely alleviate
UK economic concerns, reviving expectations for aggressive BoE rate cuts and extending
GBP/USD correction from recent highs.
Any reaction to the UK inflation report is likely to be short-lived, given the upcoming
British Spring Budget Statement, scheduled for later on Wednesday.
GBP/USD is holding above major daily Simple Moving Averages (SMA) heading into the UK CPI
showdown, with the relative Strength Index (RSI) momentum indicator in the daily chart
holding firm.The Bull Cross, confirmed on Monday, remains in play and acts as a tailwind
for the pair.
However, the pair needs acceptance above a certain threshold to initiate a sustained
uptrend. The next relevant resistance is aligned at a certain level. Alternatively, the
immediate support is seen at the 21-day SMA, below which the critical 200-day SMA will
come into play. A sustained break below this level will intensify the selling pressure,
possibly leading to a test of a psychological level.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and
services. Headline inflation is usually expressed as a percentage change on a
month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile
elements such as food and fuel which can fluctuate as of geopolitical and seasonal
factors. Core inflation is the figure economists focus on and is the level targeted by
central banks, which are mandated to keep inflation at a manageable level, usually around
2%.
The Consumer Price index (CPI) measures the change in prices of a basket of goods and
services over a period of time. It is usually expressed as a percentage change on a
month-on-month (mom) and year-on-year (YoY) basis. Core CPI is the figure targeted by
central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2%
it usually results in higher interest rates and vice versa when it falls below 2%. Since
higher interest rates are positive for a currency, higher inflation usually results in a
stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value
of its currency and vice versa for lower inflation. This is because the central bank will
normally raise interest rates to combat the higher inflation,which attract more global
capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it
preserved its value, and whilst investors will often still buy Gold for its safe-haven
properties in times of extreme market turmoil, this is not the case most of the time.This is because when inflation is high, central banks will put up interest rates to
combat it. Higher interest rates are negative for Gold because they increase the
chance-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money
in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold
as it brings interest rates down, making the bright metal a more viable investment
option.
UK inflation: Your Top Questions Answered
What is the UK Consumer Price Index (CPI) and how is it Measured?
The Consumer price Index (CPI) measures the change in prices of a basket of goods and services over time. It’s a key indicator of inflation, calculated as a percentage change on both a month-on-month (mom) and year-on-year (YoY) basis. Core CPI excludes volatile elements like food and fuel, and is what central banks like the Bank of England (BoE) focus on to manage inflation.