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U.K. Inflation Unexpectedly Rises, Propelled By Petrol Prices

The rate of inflation in the U.K. unexpectedly rose to a six-month high in January; propelled higher by petrol prices and a smaller than anticipated decline in airfares, official data showed on Wednesday.

The Office For National Statistics (ONS) announced that U.K. annual inflation jumped to 1.8% in January of 2020 from 1.3% in December. This was ahead of market expectations of 1.6%.

High Point Over The Last Six Months

It is the highest reading in six months, mainly boosted by prices of transport (1.8% vs 0.7% in December), airfares (0.9% vs -8.5%); fuels and lubricants (4.7% vs 1%,  which was the biggest rise since November 2018); housing and utilities (2% vs 0.4%), electricity (8.6% vs 3.3%); restaurants and hotels (2.2% vs 1.6%); and miscellaneous goods and services (2.4% vs 2.2%).

It is also worth noting that prices rebounded for clothing and footwear (0.2% vs -0.8%).

However, by way of contrast, inflation eased for food and non-alcoholic beverages (1.4% vs 1.7%) and was stable for recreation and culture (1.5%). Core inflation which excludes energy, fuel, alcohol and tobacco, rose to 1.6% from 1.4% in December.

Pound Pushes Higher

The pound briefly strengthened by as much as a quarter of a cent against the U.S. Dollar to 1.3024 following the figures, which showed consumer prices were not far off the Bank of England’s 2% target.

Thereafter GBPUSD has been volatile moving down to 1.2973 before recovering to 1.2995 as on 12:32 GMT (07:32 Eastern). The technical sentiment toward Sterling is mixed with buy signals seen in the very short-term, followed by selling as one moves out across the day and week ahead.

The next upside resistance for GBPUSD lies at 1.3002, still shy of the post inflation spike. If renewed selling emerges 1.2953 is the immediate downside objective.

Inflation & Interest Rates

While inflation remains modest by historical standards, the figures hinted at a moderate squeeze on household budgets as it would diminish the short-term prospect of the Bank of England (BoE) cutting rates from 0.75% even though the central bank has revised down GDP forecasts for 2020, 2021 and 2022.

Members of the Monetary Policy Committee (MPC) at the central bank had hinted in recent weeks that they might have to trim the benchmark interest rate as economic growth remains tepid. These inflation figures will skew their thinking in the short-term.

The MPC will be minded that Britain’s GDP (QoQ) was flat in the fourth quarter of 2019, following an upwardly revised 0.5% expansion in the previous three-month period and matching market expectations.

The BoE said in January that it expected inflation to run below its target through 2020, bottoming out at around 1.2% in Q3 2020.

Household spending rose at the weakest rate in four years, while government spending increased the most since the first quarter of 2012. The reason for the flat line was cited as deep uncertainty over Brexit and a general election in December. The election be over, but this year ahead still carries many challenges as the U.K. maps out an independent future free from the EU.

Seasonal Swings & Challenges For The Chancellor

January is month when the cost living usually falls as sales and other forms of discounting improve consumers purchasing power. This year, however, utility bills didn’t fall as they did in 2019 when the energy price cap kicked in. Discounts in sales for apparel were smaller than usual and not as extensive as a year ago. The implication was that they exerted less deflationary pressure on the average cost of living than expected.

What we may see is that the new Chancellor of the Exchequer, Rishi Sunak, will adopt a moderately cautious approach in the March budget.

I think, despite any pressure from Number 10 Downing Street Sunak would be advised to be expansive by announcing an increase to longer-term infrastructure investment whilst adhering to the fiscal rules for short-term spending until there is greater clarity on the economic prospects of a post-Brexit Britain. The tag-team of Boris and Dominic at Number 10 may not like it, but the chancellor has to show the markets he is his own man.

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