HomeContributorsFundamental AnalysisUK CPI to Drop, But Will It Change BoE?

UK CPI to Drop, But Will It Change BoE?

UK CPI will finally fall below double digits when the April report is issued tomorrow. Unless there is an unprecedented catastrophe, that is. While policymakers and politicians might cheer the results, the components are likely to keep the BOE on track to hike at the next meeting.

Why will UK inflation drop?

Usually, analysts are cautious about making forecasts for economic data, because surprises are very common. But this time around, the math is pretty certain. What isn’t certain, as usual, is the market reaction. So, let’s first address the math.

Back in April of 2022, between March and April, inflation jumped a whopping 2.5%. That was due to an adjustment in energy prices made by Ofgem, as gas and crude prices spiked following the imposition of sanctions on Russia over the war in Ukraine. That’s the highest monthly increase recorded, ever. It is, therefore, very, very unlikely to be repeated.

Accounting for the base effect

For the inflation rate to come in in the double digits this month, it would have to have a similar monthly increase as April of last year. Over the last few months, the median monthly inflation change has been around 0.5%. In order for annual inflation to stay at or above 10%, then monthly inflation would have to have jumped by five times the median. March inflation was 0.8%, which means that for inflation to come in at 10% (to maintain double digits), April 2023 monthly inflation would have to be 1.8%. It is currently forecast to be 0.8%. Analysts would have to be wrong by more than double in order for inflation to stay in the double digits.

But, how far below double digits is still an open question. The current average of economists’ forecasts is 8.5% for annual headline inflation, compared to 10.1% reported for last March. In other words, inflation is expected to remain quite high. The drop is thanks to technical reasons, which would likely not change monetary policy outlook.

The market movers

What the market is mostly focused on now is how the BOE will react, and it is more interested in the core inflation rate. Excluding the volatile elements of energy and food, UK inflation is expected to tick down just slightly to 6.1% compared to 6.2% prior. Over triple the BOE’s target. A one decimal decline is very unlikely to change the view of the 7 MPC members who voted last time to hike.

Meanwhile, inflation might be getting out of the BOE’s hands. In a recent presentation before the British Chamber of Commerce, BOE Governor Bailey said that core inflation was now due to “secondary effects”. Translated into English, this means that in his estimation, there are signs of the dreaded wage-price spiral that could signal inflation will remain high for a long time. That, at least in the market’s estimation, implies that even more tightening will be needed.

But, the pound might not gain so much strength, because the division in the BOE’s MPC leaves many market participants with doubts that the BOE is sufficiently committed to bring inflation down. The IMF’s new report says that the UK is likely to avoid a recession this year, which could allow room for more hiking. But whether the BOE will deliver is still an open question.

Orbex
Orbexhttp://www.orbex.com/en/agent/cl/ccc678cb86b9
At Orbex, we are dedicated to serving our clients responsibly with the latest innovations in forex tools and resources to assist you in trading.

Featured Analysis

Learn Forex Trading