The latest inflation data in the UK has come in below expectations, offering relief to the Bank of England (BOE) and impacting market expectations. Consumer prices rose 4% compared to a year earlier, in line with December’s pace, defying the BOE and private-sector economists’ forecast of a 4.1% increase. The services inflation, more directly tied to domestic pressures, also came in lower than expected at 6.5% in January, against the anticipated 6.6%.
BOE Governor Andrew Bailey, while cautious about easing due to the tight labor market and signs of economic resilience, faces a balancing act. The pound experienced a downturn as traders bet on steeper and earlier interest-rate cuts, reversing expectations after stronger-than-expected inflation data in the US. Despite the relief, Bailey remains cautious amid the labor market’s tightness and signs of economic resilience.
Bloomberg Economics analysts suggest that the stability in headline inflation provides relief, but a downward trajectory is expected in February, possibly falling below 2% in the spring. The market now predicts over 70 basis points of BOE cuts in 2024, with the first quarter-point reduction expected in August.
The UK inflation figures follow unexpected price data from the US, influencing traders’ expectations about the Federal Reserve’s policy. The pound traded weaker at $1.2565, a one-week low.
The decline in household expenses, particularly in food and household goods, could be welcome news for Prime Minister Rishi Sunak, addressing the cost-of-living crisis. However, Bailey may provide further insights into the BOE’s policy direction when addressing lawmakers in the House of Lords.
Despite relief, the inflation data reveals nuances. While food prices fell, energy prices rose, and factory gate prices paid by retailers experienced the steepest decline since the early days of the pandemic in 2020.
Chancellor of the Exchequer Jeremy Hunt emphasized that although inflation doesn’t fall in a perfect straight line, the economic plan is working. The data comes amid a crucial time for the UK government, with an election expected in the second half of the year.
