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Economists caught off guard by UK CPI, but GBP shrugs it off


UK CPI rose by 2% in the 12 months to July 2021, down from 2.5% in June and below the 2.3% expected. This is the first time UK inflation has fallen back to 2% since April and the first time in a while that UK CPI doesn’t match economists’ consensus.

This drop can be partly explained by the sharp rise in prices observed in July 2020 as lockdown restrictions were eased more broadly.

Is inflation slow down just a ‘blip’?

This slowdown in inflation is broadly regarded as a blip. The Clothing and Footwear sector as well as Recreational and Culture were attributed the largest downward contributions whilst prices for transport represented the largest upward contribution to change. At last, manufacturers felt a stronger than expected inflation. Their input prices were up 9.9% in July (from 9.7% the previous month) whilst output costs also rose 4.9% which was more than expected (4.4%).

“All in all, inflation in the UK is expected to pick up again in the coming months although base effects could create some further noise in future data,” observed Olivier Konzeoue, FX sales trader at Saxo Markets. “Investors may have just had a glimpse of how sharply inflation could fall once distortions implied by the pandemic have faded.”

Markets seemed unmoved by the print, the FTSE trading flat to mildly negative, the GBP was on the backfoot early in the day as were most G10 currencies versus USD due to new COVID outbreaks globally causing a flight to traditional safe havens.

CPI print = good news for the Bank of England

The BoE will be pleased to see the pullback to the target rate of 2% and well below last month’s reading of 2.5%.

They will hope it is a sign of transitory inflation but with COVID-19 partially closing a busy Chinese port late last week, it’s clear the supply side inflation may be with us for some time yet.

“This will ease pressure on the BoE to offer forward guidance at the September policy meeting, and another print at or below 2% in September could see market expectations of a rate hike in the middle of 2022 be pushed back,” explained Ben Carter, an analyst at Validus Risk Management. “However, today’s reading is not likely not help sterling against the dollar as GBPUSD has struggled for ground over the last few days slipping below 1.3750 on the back of the dollar strength we are seeing with rising Covid-19 concerns.”

Rising wage growth and a labour market shortage in the UK may conspire to drive up more persistent inflation trends. Core month-on-month inflation was flat vs +0.3% expected. Sterling was barely moved and was trading a little above yesterday’s three-week low around 1.3745, but still below the 200-day SMA.

RBNZ hangs fire as COVID bites back

Other central bank action today focuses on New Zealand. The Reserve Bank of New Zealand postponed its first interest rate hike, after the country moved into lockdown following a number of cases of Covid-19 were detected, the first such in six months.

A policy of zero-covid seems unsustainable in the long run, but the regime is set on this hard-line path. The RBNZ is set to hike still, but if there are ongoing intermittent lockdowns it could be delaying again, though governor Adrian Orr said the country is going to face rolling periods of Covid disruption and can handle it. NZDUSD spiked to 0.6880 but has pared losses to regain the 0.69 handle.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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