UK Core Inflation Breaches 7% as Headline Beats Estimates, GBP/USD Bid
The estimated core inflation rate in the UK has increased to 7.1% over the 12-month period ending in May 2023, surpassing the April figure of 6.8%. This represents the highest level of inflation since March 1992 and comes ahead of a forthcoming Bank of England meeting.
The year-on-year inflation rate has remained stable at 8.7%, surpassing previous estimates of approximately 8.4% and sustaining a 13-month low. While this may seem positive, the figure remains notably high and is expected to raise ongoing concerns for the Bank of England (BoE). Although food inflation has decelerated and motor fuel prices have declined, increases in air travel, recreational and cultural goods and services, and second-hand cars have compensated for these trends. Given these findings, it is probable that BoE policymakers will face additional pressure in advance of tomorrow’s meeting.
Sources of data - Office for National Statistics
Food price inflation remains a cause for concern despite a slight decrease in overall inflation for the month. However, the year-on-year rate for food price inflation is significantly higher than the overall inflation rate. In May, fuel prices had the greatest impact on monthly inflation, dropping by 13.1% year-on-year compared to 8.9% in April. Although the inflation rate for UK goods decreased slightly to 9.7% in May, there is still concern about the acceleration of service sector inflation, which reached 7.4%. This poses an additional risk to the fight against inflation as the UK enters a busy summer period that may keep service sector inflation on the rise.
Implication for the Bank of England (BOE) moving forward
The Bank of England (BoE) encounters distinctive challenges in steering through the current economic climate. The upcoming BoE meeting gains particular importance as the ECB and the Federal Reserve have already released their respective projections for the second half of 2023. This puts added pressure on the BoE to respond effectively to market expectations.
The topic of inflation in the United Kingdom remains a contentious subject with a particular emphasis on the escalating mortgage payments. Recently, the issue of mortgages was deliberated in the House of Commons and Chancellor Jeremy Hunt cautioned against any additional government intervention as it could potentially exacerbate inflationary pressures. The Chancellor encouraged financially strained individuals to consider utilizing existing government support measures.
The Bank of England’s peak interest rate has been a subject of debate, with current market estimates hovering around 5.75%. This suggests a potential increase of 130 basis points, which the Bank of England considers overly optimistic. Going forward, the Core inflation print will likely play a significant role in the Bank’s decision-making process, especially after today’s acceleration in inflation. Despite hopes for a decrease in inflation over the past year, it is expected to be a challenging path ahead due to pre-existing inflation within markets. This could further complicate matters for the Bank of England moving forward.
Market Reaction
GBP/USD Daily Chart
At the time of writing, GBPUSD experienced a 50-pip increase towards the 1.2800 zone before decreasing to trade at 1.2770. Despite this, bulls continue to dominate following last week’s new annual high. The immediate support level is situated around the 1.2680 region, with attention shifting towards the 1.2600 and 1.2500 areas, the latter of which corresponds with the 50-day MA.
It is important to monitor the upward trend and the significant psychological level of 1.3000, as a breach above this mark could indicate a potential move towards the 1.3250 zone.
Key Levels to Keep an Eye on:
Support Levels:
- 1.2680
- 1.2600
- 1.2510 (50-day MA)
Resistance Levels:
- 1.2850
- 1.3000
- 1.3250
