Sterling slid to a two-month low against the dollar after the rate of inflation came in at just 2.2% in October, tumbling from 2.7% the previous month and much lower than economists had expected. This is the lowest UK inflation rate in four years.
Plenty of economists were quick to note that at 2.2%, it is still three times the average pace of wage growth. This highlights the fact that real wages are in fact falling in the UK and many households are still struggling.
Lower inflation was driven by cheaper fuel prices and smaller rises in university tuition fees than this time last year; however economists were quick to warn that with energy price hikes on the horizon consumers would continue to feel big strains on their budgets. This could prove a difficult time for retailers in the crucial Christmas spending period.
In Germany October inflation fell to the lowest level in three years to just 1.2% adding fears to weak demand across the Eurozone this data suggests that the European Central Bank was right to cut interest rates to a new record low last week of 0.25%
Inflation is also dropping in the Czech Republic - where the consumer prices index dropped to just 0.9% year on year in October. According to Reuters, is the lowest level since 1974.
This fear of deflation prompted the Czech central bank to intervene and devalue their currency earlier in the week by nearly 3%.
All eyes will be on the UK today where the Bank of England will release their quarterly inflation report. Following this Governor Mark Carney will discuss how he feels the forward guidance is working out. The BOE will not look to lower interest rates until unemployment reaches 7%. Currently unemployment is at 7.7%, with many economists in the belief that the UK is on track to fall to 7% before 2016.
However a word of caution. Whilst many are expecting growth forecasts to be revised higher; there is a possibility that the tone and content of Carney’s speech may not match the expectations of the market, and this could prompt a sterling sell off.
Eurozone industrial production is forecasted to fall by 0.3% for October, which could put pressure on the euro.
9.30am – GBP – Claimant Count Change (Sep): Expected to fall by 35,000.
9.30am – GBP – Unemployment Rate (Sep): Expected to fall to 7.6%.
10.00am – EUR – Industrial Production (Sep): Expected to fall by 0.3% month on month.
10.30am – GBP – Bank of England Quarterly Inflation Report.
12.10pm – EUR – German Central Banker Jens Weidmann Speech.
19.00pm – USD – Monthly Budget Statement.