UK inflation unexpectedly levels down

USD

Surprise US inflation data rattled markets yesterday as CPI data showed inflation higher than expected. US headline CPI inflation rose 8.3% year-on-year in August, defying expectations for a reading of 8.1%. However the figure was still lower than July’s 8.5%. More importantly, Core CPI rose 0.6% in August, double the 0.3% the market was expecting.

The Federal Reserve was nailed on for an interest rates rise between 50 to 75 basis points before yesterday’s data. Markets are now pricing in a 100 basis points rates rise at sixteen to eighteen percent. While it is likely the Fed will stick to a 0.75% increase, it seems inflation has not yet peaked and higher rates could be around for longer. As a result, the US dollar regained all losses from earlier in the week and gained against all majors and G10 currencies.

GBP

This morning saw the release of the latest UK inflation data. The UK’s rate of inflation eased to single digits in August as a result of lower petrol prices, providing some relief to households. Headline CPI was 9.9% higher than a year earlier during the month, down from a forty-year high of 10.1% in July.

Economists now expect the inflation rate to hover around the 10% level through the autumn rather than rising to over 15% previously forecast. This comes after Prime Minister Liz Truss’ announcement that the government would introduce a price cap to protect the British public from an 80% increase in gas prices from October. However, the package to support households will likely cause inflation to remain higher for longer, and may force the Bank of England to keep interest rates at the same level or even higher for longer than people would like. This week’s BoE meeting has been postponed to next week and we expect the bank to raise rates by 50 to 75 basis points.

Key announcements

07:00 – GBP – CPI y/y (actual 9.9% vs forecast 10%)

07:00 – GBP – Core CPI y/y (actual 6.3% vs forecast 6.2%)

13:00 – USD – PPI m/m (forecast -0.1% vs previous -0.5%)