UK CPI provides welcome boost for Sterling
18th March 2008
Sterling extended gains against the Dollar and the Euro earlier this morning after UK inflation leapt to a nine month high in February, trimming expectations for near-term interest rate cuts. The Office for National Statistics highlighted that consumer prices rose by 0.7%m/m for an annual rate of 2.5%y/y, significantly above the Bank of England’s 2.0% target.
The jump in inflation was largely down to alterations in the way utility bills are incorporated into the index. Recent hikes in gas and electricity prices now hit the index immediately, as opposed to being phased in over several months as in previous releases. Without the change in methodology, the annual rate of inflation would have remained unchanged at 2.2%. The data exacerbates the dilemma facing the Bank of England, as it aims to control rising prices in the face of slowing growth. However, the Bank will find some comfort knowing that core inflation, that strips out volatile food and energy prices fell to 1.2%y/y; its lowest rate since August 2006.
Taking into account last weeks record high producer price inflation data, we still expect CPI to rise considerably higher, testing 3.0% later on in the year. Whilst further rate cuts remain likely, today’s data will provide a dilemma for the BoE when looking to ease monetary policy in light of recent tensions amongst the financial markets.