The UK's inflation data in December came as a surprise to the markets on Wednesday. Even with slower wage growth, the most recent statistics may lead to an extended period of higher interest rates.
On Wednesday, the UK's December inflation data caught the attention of investors. This data raised the possibility of the Bank of England discussing interest rate reductions due to the softer inflation figures.
However, the UK's annual inflation rate climbed from 3.9% to 4.0% in December, exceeding economists' predictions of 3.8%. Core inflation remained steady at 5.1%, higher than the anticipated 4.9%.
The Office for National Statistics reported that the Consumer Prices Index, including owner-occupier's housing costs (CPIH), grew by 4.2% year-over-year in December. The increase was primarily driven by a surge in alcohol and tobacco prices, which rose by 12.8% over the 12 months to December. Conversely, the prices for food and non-alcoholic beverages decreased by 8.0% in the same period.
The inflation figures have lowered expectations for a Bank of England interest rate cut in the first half of 2024. The report followed weaker UK wage growth data, which might impact consumer spending and suppress demand-driven inflation. However, the December inflation numbers could outweigh the implications of the wage growth figures.
Prior to the release of the UK inflation report, the GBP/USD reached a high of $1.26438 before dipping to $1.25964. Following the report, the GBP/USD surged from $1.26051 to $1.26438. By the end of Wednesday, the GBP/USD was down 0.07% to $1.26272.
170124 GBPUSD 3 Minute Chart
Investor attention will shift to US retail sales data on Wednesday, with economists predicting a 0.4% increase in December, following a 0.3% rise in November. A rise in consumer spending could fuel demand-driven inflation, potentially delaying Fed rate cuts aimed to control expenditure.
Additionally, it is essential for investors to monitor speeches by Fed members Michael Barr, Michelle Bowman, and John Williams for insights into future interest rate guidance.
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