Inflation data has come in far stronger than expected. I say far stronger. It was certainly more than what economists had been looking for. And of course, this adds extra pressure on the Bank of England to keep interest rates on hold. We’re just getting that breaking news coming through from Davos with Christine Lagarde, the chief of the European Central Bank, suggesting that maybe markets are getting ahead of themselves to try to price in some interest rate declines.
Consumer price index
It doesn’t look like that’s going to happen here. Look at these numbers. Consumer price index rising 4%. It’s only a small rise against forecasts, but nonetheless, it’s what we saw last week from the US and shows that inflation is likely to remain sticky. Economists had forecast a drop to 3.8% from 3.9% core CPI growth. This is at 5.1%. Expectations there had been for a drop to 4.9%. Now this book, it marks the first increase, the consumer price index here in the U.K. of inflation in 11 months. And we’re expecting inflation to tick up again next month. January’s figures due to a hike in the Ofgem energy price cap.
Economist and forecast further declines in this. I think what I want to show you is to what’s going on on the foreign exchange markets. Look at this. These are one minute candles. Sterling And you can clearly see the second that this data came out and we’re building on this at the moment. Now, that is GBP/USD. We already know that the US dollar is strong, but Sterling is absolutely up against the dollar. That being said, in the context, you can see Sterling has been down recently. In fact, in today’s session, at the lowest point so far today, we’ve seen it tick down to levels not seen since the 32 December. So let’s just put a little bit of reality on this against that stronger dollar. This is exactly what is happening here.
The Bank of England
And much of that upside has been given to us in the last half hour since the release of that data. So I think the message is here is that we’ve got an issue that’s faced by the Bank of England where interest rates are just not going to come down as fast as many had been hoping. For example, the rate of core inflation, which strips out the volatile elements like food and fuel, remaining at 5.1%. Retail prices, which includes a bigger basket such as council tax, come in at 5.2%, down from 5.3%. Your forecast for that up to 5.1%. So looking at this green candle here, I suspect could well see some further upside sterling against the euro. But don’t forget those news headlines coming through from Christine Lagarde suggesting that the European Central Bank is in the same position, that it expect interest rates to come down as soon as the markets are pricing in.