Private DCN Private DCN - Sterling

Highest rate of UK inflation since 2013 is bittersweet

By Ricky Bean March 22nd, 2017

Sterling (GBP, pound) was boosted after inflation rose to 2.3% from 1.8% last month, exceeding analysts’ expectations. The rising cost of fuel and food prices have pushed the rate of inflation to its highest level since September 2013 and above the Bank of England’s (BoE) 2% target. Last October, BoE Governor Mark Carney said he was willing to let inflation temporarily overshoot the 2% target in order to boost economic growth and reduce unemployment. However, this year he went on to say there are “limits to the extent to which above-target inflation can be tolerated”. This led many analysts to believe there could be an outside chance of a rate hike, regardless of Brexit discussions.

It’s worth keeping a close eye on another form of inflation number in the form of the retail price index (RPI). This pushed higher to 3.2%, which could prove significant as there are various products such as train fares that are directly linked to the RPI rate for July. Because inflation is forecast to continue rising this could be a bittersweet pill for many. While we are seeing sterling increase in value on the back of the numbers, we could also see mortgage rates and products such as regulated rail fares increase. The rate of inflation now exceeds the increase in average earnings, which could restrain the BoE from raising rates in the near-term.

There were further signs that the Brexit negotiations between the UK and EU are going to be tough. After Spanish secretary of state for the European Union (EU) stated that “before starting to negotiate the future framework of the relationship between the EU and the UK, we have to agree at least the basic principles of the financial implications of the exit agreement”.

Economic data from the UK is light today. As a result the market will decipher yesterday’s inflation report to determine what effect it will have on tomorrow’s retail sales. With inflation soaring there is now some downside risk that retail sales will disappoint on Thursday and miss the forecast level of 0.4%. The headline retail sales number is already coming off the back of two consecutive negative numbers.