U.K. Inflation Jumps Higher, GBPUSD Fails to React

U.K. September CPI surged to 5.2% y/y from 4.7% in August. This was above the consensus forecast for 5.0% but also above our own above-median 5.1% estimate and follows a 0.5% m/m increase. RPI growth hit 5.0% y/y (median 4.9%), versus 4.8% in August, while RPIX was up 5.5% y/y, compared to 5.2% for the previous month. The headline CPI reading was yet another record high since the series began in 1997 and as expected, it was tiding utility bills that provided the largest upward contribution to September inflation. The ONS also said that the BoE MPC did not have access to these figures at its Wednesday meeting last week, when the repo rate was cut by 50 bps. However, given the expected sharp slowdown to U.K. growth this year and next, inflation is expected to fall back next year and the MPC appeared confident that the risk for second-round effects had subsided enough to loosen monetary policy further. Meanwhile, pound-dollar (GBPUSD) maintained a firm tone after the U.K. September CPI accelerated to 5.2% y/y, which was above expectations. Cable was already in its ascendency and traded up to 1.7569 highs on the release before turning back towards 1.7500, while EUR-GBP is now challenging level underneath 0.7800 handle and eyes a retest of the 0.7778 Asian session lows. The September BoE Inflation Report indicated that inflation would rise above 5% in the coming months, so this release is not too surprising, although the ONS said that the BoE MPC did not have access to these figures when making its decision to cut rates last week. However, given the financial market conditions and the increased risk of a sharp and protracted slowdown in growth it's likely that inflationary concerns are less significant than they once were. Inflation should fall inline with growth next year, which will leave the BoE on a path of easier monetary policy and sterling may offer levels to sell up here.

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