Earlier today, the UK CPI data revealed a huge upside surprise in April. Yearly inflation came out at 8.7% vs. 8.2%, and the core data, which does not consider food, alcohol, tobacco, and energy prices, was seen at 6.8% vs. 6.2% expected.
It shows, once again, that bringing inflation down is a bumpy process. One should remember that UK inflation rose much more than inflation in the United States or the Euro area, so the Bank of England had a tougher job.
Speaking of the Bank of England, it is again in a tough spot. Following today’s data, the bets that the central bank will raise the interest rate again rose sharply.
This should be a hawkish development for the British pound, but this year markets have moved chaotically, if they moved at all. Volatility in the FX market is at depressed levels, as traders mostly try to anticipate the terminal rate in developed economies.
Also, other events, such as the debt ceiling negotiations, keep the markets at bay. In other words, no one is taking a bet yet, and the safest place seems to be on the sidelines.
UK inflation is coming down from highs, but the road is bumpy
Electricity and gas prices, as well as food and non-alcoholic beverages, continued to increase in April. The annual CPI inflation came down from the highs but remained well above the central bank’s target.
This appears to be a problem in all major developed economies. As such, some economists wonder if it would not be appropriate for major central banks to raise their inflation target from the current 2% to a higher level, such as 3%.
In any case, the British pound was not impressed by the upside surprise in the April inflation data. Indeed, it spiked on the news, but sellers stepped in and sent the GBP pairs back to their levels before the data was released.
It tells us that traders are aware of the bumpy road ahead in the central banks’ fight against inflation and that, as long as the overall trend is for the annual inflation to ease, patience is key.
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