UK CPI To Influence BoE and GBP

23/05/2023

"Phew!" At last, the UK’s stubbornly high inflation theme is set to get some relief as a run of seven consecutive months of double-digit CPI is set to end tomorrow. In fact, the April headline print is predicted to decline dramatically, to around 8% after averaging above 10.4% since October last year.

This is almost entirely due to the dropping out of energy base effects after the spike in prices after the Russian invasion of Ukraine. This caused a sharp jump in Ofgem’s household energy price cap in April 2022 and misery to millions of UK households who have seen their energy bills surge. There may also be more relatively good news as food prices might have passed their peak. This would match those in the eurozone and the downtrend seen in producer food price inflation.

A key issue for policymakers on the MPC will be still sticky core items, especially services. This was highlighted by today’s PMI data which again saw a tale of two economies with a widening divergence between weak manufacturing and the surging services sector. The growth spurt seen in the latter could potentially drive renewed inflationary pressures. Thursday’s Ofgem announcement about a significant cut in its household energy price cap in July will also be key for the inflation outlook.

Sterling dropped to a near one-month low earlier today against the dollar. Greater weakness in tomorrow’s report will be seized upon by sellers. Markets currently fully expect another 25bp rate rise at the June Bank of England meeting. This report will be another piece in the puzzle for policymakers. But it may not be make-or-break just yet for the pound as we have another CPI report and wage data before then.

Here are the main numbers expected in tomorrow's report: