Consumer inflation continues to gain momentum in the UK. Data for May showed that CPI accelerated to 9.1% y/y - a record among the G7 and a 40-year high. The monthly price growth rate was 0.7% compared to 2.5% and 1.1% in the previous two months. However, apart from the reversal to lower base commodity and energy prices in the last couple of weeks, there is little indication that the Bank of England can relax. Moreover, it needs to double the pace of the rate increase from 25 points at once.
Last month producer input prices rose by 2.1% and output prices by 1.6%, reaching an annual rate of 22% and 15.6%, respectively. Under these conditions, producers and retailers will continue to pass increasing costs down to consumers. Unlike in the early years after the financial crisis, retail sales and employment are strong, which allows such a shift of rising outlays to end consumers.
It could take another two months of waiting for a turning point in inflation, the CPI will reach a high base effect, and in that time, the CPI could get double-digit y/y growth rates.
In this environment, the Bank of England’s moves to raise the rate by 25 points at each meeting are not capable of curbing inflation.
Perhaps the main positive effect of this policy is the devaluation of the pound’s purchasing power and the reduction of the debt burden in real terms. However, the more obvious consequence of such policies is a drop in confidence in local financial markets and the pound, which we see with the Japanese yen at its lows against the dollar in 24 years.
GBPUSD is now trading at 1.22 - near the psychological low of 1.2000, where it received critical support in 2017 and 2020. But that support may not survive the third test of strength due to an increasingly threatening gap between inflation and interest rates, which would devalue debt. But this is a risky policy that could undermine confidence in the financial system, which will require decisive and brutal measures for the economy to restore.
Trade Responsibly. CFDs and Spread Betting are complex instruments and come with a high risk of losing money rapidly due to leverage. 77.37% of retail investor accounts lose money when trading CFDs and Spread Betting with this provider. The Analysts' opinions are for informational purposes only and should not be considered as a recommendation or trading advice.
Recommended Content
Editors’ Picks
AUD/USD remains under pressure above 0.6400
AUD/USD managed to regain some composure and rebounded markedly from Tuesday’s YTD lows in the sub-0.6400 region ahead of the release of the Australian labour market report on Thursday.
EUR/USD faces decent contention around 1.0600
The knee-jerk in the Greenback reignited some buying interest in the risk complex and pushed EUR/USD to three-day highs near 1.0680, rapidly leaving behind the recent yearly low around 1.0600.
Gold eases despite risk-off mood
Gold trades in a relatively tight range near $2,390 in the second half of the day on Wednesday. In the absence of high-tier data releases, investors keep a close eye on headlines surrounding the Iran-Israel conflict.
Ethereum trades around the $3,000 support following a surge in validator queue
Ethereum (ETH) continued a sideways movement on Wednesday as investors seemed to be waiting for an upward or downward price catalyst. Despite the price stagnancy, the ETH validator queue - possibly fueled by the DeFi restaking boom - rose sharply.
Markets stabilize after Powell rules out rate hike, but the signs don’t look good
Markets are volatile right now; however, a relative calm has descended on the market and US. US stocks are down a touch, but the Vix is lower, US Treasury yields are lower, and the dollar is mostly lower vs. its G10 FX counterparts.