The first of two UK inflation reports, before the June Bank of England rate decision, will arrive on Wednesday at 07.00 BST. In short, the headline will get very close to the bank’s 2% target. But watch services inflation, expected at 5.4%, as this is the key gauge for policymakers and could move GBP.
UK CPI is a pivotal risk event for GBP and holds the keys to a potential rate cut by the Bank of England next month. In fact, it could be a tale of two inflation readings as the headline figure is set to ease quite dramatically and potentially hit the Bank of England’s 2% target. It is forecast to come in at 2.1% from 3.2% in April. This will undoubtedly grab a lot of the headlines as only eighteen months ago, this hit a 42-year high at 11.1% when hot inflation gripped markets and the wider population. The core print is predicted to rise 3.6% from 4.2% previously.
Easing supply chains and falling energy prices have brought CPI down since October 2022. The latest report will see the April headline rate slide further due to a 12% fall in the household energy bills cap set by the energy regulator Ofgem, following a decline in wholesale gas prices.
Services Inflation is key metric
The MPC at the Bank of England is most focused on services inflation which is the crucial gauge as to whether rate setters will pull the trigger next month. This figure is connected with wage growth which has been sticky and elevated. and taking time to cool. Services price growth is predicted to come in around 5.5%, which is the number forecast by the BoE.
Going forward, the services print should decline further as wages gradually slow. Regarding headline inflation in general, it is predicted to remain around 2% over the next few months before rising modestly due to the unwinding of those energy-related moves higher seen over a year ago. Indeed, Governor Bailey backed this up when he recently warned that price pressures could rise into the summer, with the headline remaining above the bank’s 2% target.
Market reaction
GBP could be quite volatile as markets are pricing in around a 56% chance of a June 25bps rate cut, so more or less a coin toss. We note there is another CPI report the day before the June BoE meeting as well as two wage data reports before the Old Lady meets next month.
An upside surprise in the data could boost cable, which has enjoyed a stellar three weeks versus the dollar. Modestly softer than expected US inflation recently fuelled hopes of rate cuts across the pond, hurting the greenback. Cooler data might see sterling sold, though markets will be wary of more incoming data in the next few weeks.
