CPI Stalls, But Still Above Target

The latest set of UK inflation data released today showed that CPI softened somewhat over the last month. Following the record surge in August, when prices rose to 3.2%, headline CPI fell back to 3.1% in September. Core CPI softened similarly, moving down to 2.9% from 3.1% prior. While inflation is still above the BOE’s target at this level, the loss of upside momentum will be welcomed by the BOE, suggesting that perhaps the price surge is over for now, in line with the bank’s initial forecasts that such a spike would prove transitory.

"Eat Out To Help Out" Impact

Looking at the breakdown of the data released by the Office for National Statistics, the ONS reported that the fall-back is due to the unwinding effect following the end of the Government’s "Eat Out To Help Out" Scheme last August. However, Mike Hardie, head of prices at the ONS added the caveat that “this was partially offset by most other categories, including price rises for furniture and household goods and food prices falling more slowly than this time last year.”

As expected, the biggest upward contributor came from transport prices, which rose 0.91% on the year, driven by the uptick in fuel prices. Housing and household services also saw large upward contributions of 0.69%. Meanwhile, the biggest downside contribution came from restaurants and hotels.

Rate Hike Probabilities

The data comes just days after BOE governor Andrew Bailey warned that the BOE “will have to act” on inflation. Echoing previous comments from himself and other BOE policymakers, the UK rates market is currently pricing in a roughly 70% chance of a hike in December, with probabilities for a November hike dipping slightly to around 30% following the data.

The focus now will be on incoming data ahead of that time. Bailey has warned that the current spike in energy prices has disrupted the BOE’s inflation outlook with inflation now expected to remain at higher levels for longer. If October’s data is seen around the current levels, a December hike looks a sure thing.

Technical Views

GBPUSD

The recent rally in GBPUSD has seen the market breaking out above the bearish channel from YTD highs. Price is currently stalled at the 1.38 level though, with both MACD and RSI bullish and the retail community around 80% short, the focus is on a breakout and a test of the 1.40 level next.