Official figures released this morning have shown that UK inflation jumped to its highest level in more than two years in December. The news sent the pound surging higher against the US dollar with the exchange rate moving back above last week’s closing level and closing the gap. The FTSE 100 has seen some selling in early trade with the weakness coming from both a rise in the local currency and a soft start for European bourses which has dampened the mood in London.
Rising prices to squeeze consumers
The 1.6% rise in the consumer price index (CPI) for December was a marked pick-up from the 1.2% seen previously, with air fares, food prices and fuel all contributing to the increase. Whilst the annual rate remains below the Bank of England’s target of 2%, the rise could start to put some pressure on the institution that has faced criticism from many quarters of late for its policy response to the EU referendum. Critics have focused on Governor Carney and the MPC’s decision to easy policy aggressively in the wake of the Brexit vote, despite the economy continuing to appear robust. Whilst expansionary policies supportive of growth are deemed favourable in that respect, a side effect of monetary easing can be rising inflation and today’s data gives added weight to this line of attack. This means that the bank could find itself stuck between a rock and a hard place in the not too distant future if prices continue to rise and we see a slowdown in economic activity.
Over to PM May
Later this morning UK Prime Minister Theresa May will speak at Lancaster House in a highly expected talk that is expected to lay out 12 key negotiating objectives for the UK in the Brexit discussions. The rhetoric is expected to be stern as Mrs. May is believed to call for a “clean” Brexit which on the face of it appears to be synonymous with the so-called “hard” Brexit many Europhiles feared. The crux of the matter from an economic point of view falls on whether or not the UK will remain a member of the Single Market or Customs Union, with the UK PM expected to signal that this is not a priority as she focuses her attention more on immigration controls. Despite the recovery seen in the pound this morning the currency remains vulnerable to this speech and there will be many nervous policymakers watching the market, hopeful that the speech won’t cause erratic moves with the October flash crash in Sterling still fresh in the memory.
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