Sterling slumps on weaker than expected CPI
12 February 2008
Official data released this morning confirmed that British consumer price inflation rose in January to 2.2%y/y; the highest rate seen since June 2007. However, the figure came in largely below analyst’s expectations of 2.3%y/y as consumer prices fell by a larger than expected 0.7% in the month of January. The key contributories to the upside were from transport costs, up 6.4% over the year while the anticipated rise in the cost of fuels rose nearly 20% on the year.
While the year on year rate of inflation creeps further away from the Bank of England’s 2.0% target, it will have been encouraging at least to see core inflation easing to 1.3% from 1.4% helped by a bigger than expected decline in clothing and footwear. However, the Retail Price Index (RPI) inflation measurement, which includes mortgage interest payments, rose to 4.1%y/y from 4% in December and will keep inflation expectations elevated.
This morning’s consumer price inflationary data comes amid yesterday’s surge in factory gate inflation, accelerating to its strongest rate for 16 years. This would suggest that retailers are absorbing the majority of the steep cost increases and that weaker demand is helping to contain inflationary pressures.
In reaction, Sterling weakened across the board on speculation that the BoE now have greater manoeuvrability to continue cutting interest rates if the current economic slow down persists.