UK inflation numbers were released today and they were in line with economists’ expectations of a rise of 1.3% year-on-year. In actual fact, inflation slightly accelerated from the previous month’s 1.2% annual rate. Core inflation, which excludes food and energy, held constant at 1.5%.
Although transportation costs fell, the drop was smaller than a year ago and this actually pushed inflation up. The Office for National Statistics gave the reductions in motor fuel prices and air tickets as the main reason for lower transportation costs. Fuel prices and food prices are currently depressing inflation by 0.3% and the ONS makes the point that usually these prices have a positive effect on inflation. Regarding food products, the price war between UK supermarkets was ongoing, which led to continuing declines in that category.
One of biggest positive contributors to inflation was recreation and culture, as the price of toys and specifically computer games contributed positively. Many software companies release some of their best and newest titles in the run-up to Christmas.
Inflation is the key target that the Bank of England tries to achieve. The fact that last week Governor Carney said he was “more likely than not” to face a situation that inflation falls below 1% in the future, was a dovish message that led to more pound selling. The market currently does not expect the Bank of England to raise interest rates until the second half of 2015 and maybe even later if inflation remains subdued. This could continue to hurt the pound as earlier in the year some were expecting a rate rise in the UK as soon as this year.
Following the release, the pound was mixed, not revealing any particular bias although on Friday it made a 14-month low against the dollar at 1.5591.