UK Inflation data a pointer to US equivalent ?

Wednesday 19th August 2015

UK Inflation data a pointer to US equivalent ?

Ref : "Sterling on a high after unexpected inflation rise" , The Times, p.35

The UK is of particular significance at the moment .... its growth numbers roughly mirror those of the US (with which it shares a good many characteristics) and plainly the two economies are at similar stages of the cycle. Consequently, both central banks are faced with the same decision as to when to raise interest rates, even if the US Fed is expected to act a few months ahead of the Bank of England.

Yesterday saw the release of the July UK Consumer Price Index (CPI), up 0.1% after 0.0% in June. So what (you might reasonably ask) ? It's hardly an earth-shattering number, it's true ... but of more interest was the Core CPI number, which strips out volatile food and energy components and jumped from 0.8% to 1.2%. This is the kind of thing the BoE has been warning about when it talks of upward movement in longer-term inflation once the fall in oil prices is taken out of the equation. In theory, it adds weight to the argument for a rate rise. The trouble with that is that oil and commodities, both mineral and agricultural, have resumed their slump, and more than a few analysts are predicting a return to negative inflation numbers before long. Nevertheless, the strong number and its possible interest rate implications was enough to send sterling on another upward charge to its strongest level in over 7 years on a trade-weighted basis. Ironically, the monetary tightening effects of such a strong currency may actually play apart in delaying a hike by the BoE.

From a global perspective, the much more important July US CPI data is out today, expected to show a rise of 0.2% in both headline and core numbers. What can we learn from reactions to yesterday's UK data ? Only that the markets will probably react in the same way to strong data, with the calls for the Fed to hike rates in September getting louder, strength in the dollar after recently taking a breather etc etc..... Beware of OVERreaction however. There is plenty more data to come before the rate decision and it's unlikely that it will all point one way.