GBP retreats after inflation miss

The pound is falling across the board this morning after the latest inflation data for the UK showed a smaller than expected rise in prices. Prior to the release the GBPUSD had popped back above 1.31 once more to trade at its highest level in nine months, albeit more due to weakness in the buck rather than broad strength in sterling. The FTSE 100 had gotten off to a soft start alongside its European peer, however the drop in the pound has seen the leading UK benchmark move out of the red and turn positive on the day.  

Sharpest CPI decline in two years

The UK consumer price index (CPI) for June rose in year-on-year terms by 2.6% but despite this metric still exceeding the Bank of England’s 2% inflation threshold, the pound has declined since the release. This is likely due to the reading being below the consensus estimate which was for a print inline with the prior reading of 2.9% and a drop of 30 basis points is in fact the largest decline on a prior month’s number in two years. Rising prices have been a growing problem for the UK economy in recent months with the last four CPI readings all coming in above expected and the recent dissent amongst rate-setters is in no small part due to this. Furthermore, due to the stagnation in annualised wage growth around the 2% mark, real earnings have been squeezed.

Drop in GBP to have less impact ahead?

One of the chief causes of the spike higher in the CPI has been the sharp depreciation in the pound, meaning year-on-year measures up until now have compared a pre and post-Brexit referendum environment. The next reading will be include data from after the referendum as a base which could mean at least some subsidence of the effects from the currency depreciation. Whether the prior represents a high point remains to be seen, but today’s reading will come as a pleasing development for BoE Governor Carney and others doves amongst the MPC who clearly favour keeping an accommodative approach to monetary policy for the foreseeable future in an attempt to dampen the effects of any slowdown in the broader economy whilst the Brexit terms are negotiated.