UK headline inflation rose to 3.1% year-on-year in August, the Office for National Statistics said, up from 2.9% in July and matching the consensus estimate. The rise was driven by higher petrol and diesel prices, while core inflation held at 2.6% and services inflation stayed flat at 3.4%, leaving tomorrow’s Bank of England decision as the bigger risk for sterling.
GBP/USD dipped from around 1.3486 to about 1.3479 in the half hour bracketing this morning’s release, a move of roughly a twentieth of one percent, as the headline figure landed exactly where markets had expected. The muted move reflects a print that landed exactly in line with consensus, leaving little for markets to reprice.
The steadiness in core and services inflation matters because it points to the headline rise reflecting a single volatile input at the pump, rather than a broadening of price pressures across wages and domestic pricing. Core and services readings are the measures the Bank of England watches most closely, precisely because they strip out volatile items like fuel and are seen as a better guide to domestically-generated, persistent price pressure. A rise concentrated in one volatile input, rather than spreading into those underlying measures, is generally read by economists as less likely to force a policy response than a broad-based increase would be. Bank Rate has stood at 3.75% since before this release, with the Bank of England’s decision due tomorrow and no change expected.
Sanjay Raja, economist at Deutsche Bank, said the print was in line with expectations.
UK inflation did what most forecasters thought it would in August: it went up. Headline CPI rose to 3.1% y/y – marking its highest print since December last year.
Sanjay Raja, Deutsche Bank
Markets are pricing only around a one-in-five chance of a quarter-point hike tomorrow, the Guardian reported, and today’s data keeps that pricing broadly intact. For traders holding sterling positions, the risk event is no longer today’s inflation number but the language the Bank uses to explain its decision.