Sterling is rising across the board after data released this morning showed that UK inflation neared the Bank of England’s (BoE) 2% target but did not slow as much as expected. This has left the likelihood of a June rate cut unchanged at around 50%. GBP/USD and GBP/EUR have both reached new 2-month highs at $1.2760 and €1.1740, respectively.
Inflation peaked at 11.1% in October 2022, its highest in 40 years. Since then, there has been significant progress in reducing price pressures, with the headline consumer price index dropping to 2.3% year-on-year in April—its lowest since the summer of 2021 and a substantial decrease from the 3.2% recorded in March. However, this fall in inflation did not meet the consensus forecast of 2.1%, which was also the BoE's expectation. Prices of electricity, gas, and other fuels fell by 27.1% year-on-year, the largest drop since records began in 1989. Additionally, core inflation, which excludes volatile food and energy costs, fell to 3.9% from 4.2%. Services inflation, closely monitored by the BoE for signs of domestic pressure, was expected to slow to 5.5% but remained relatively unchanged at 5.9% after a 6% reading the previous month. This is significant and is a key reason why a June rate cut might be off the table.
UK inflation is narrowing in scope, with over 40% of items in the CPI basket now under the 2% target. However, there is still a way to go for the BoE, with over 12% of items still rising at a pace of 6-8%. Moreover, because the latest figures exceeded forecasts, particularly in services inflation, this is a major setback for those advocating a BoE rate cut in June, and it explains why the pound has appreciated this morning.
