UK Inflation Rate Rises to 4.0% Dashing Hopes for BoE Rate Cut Discussions

Highlights

• The UK annual inflation rate increased from 3.9% to 4.0% in December.
• Prices for alcohol and tobacco pushed the inflation rate higher.
• The December numbers could leave the BoE in a higher-for-longer holding pattern for interest rates.

UK Consumer Price Inflation Report

On Wednesday, UK inflation numbers for December garnered investor interest. Softer inflation figures could allow the Bank of England to begin discussing interest rate cuts.

However, the UK annual inflation rate rose from 3.9% to 4.0% in December. Economists forecast an inflation rate of 3.8%. Core inflation remained unchanged at 5.1%. Economists expected a core inflation rate of 4.9%.

According to the Office for National Statistics,

• The Consumer Prices Index, including owner-occupier’s housing costs (CPIH), increased by 4.2% year-over-year in December.
• Alcohol and tobacco prices had the largest contribution to inflation.
• Prices for alcohol and tobacco rose by 12.8% in the 12 months to December (Nov: +10.2%).
• In contrast, food and non-alcoholic beverages had the most marked downward contribution.
• Food and non-alcoholic beverage prices increased by 8.0% in 12 months to December (Nov: 9.2%).
• Consumer prices increased by 0.4% in December after falling by 0.2% in November.

Bank of England Monetary Policy Implications

The UK inflation figures reduced bets on an H1 2024 BoE rate cut. Significantly, the inflation report followed UK wage growth figures from Tuesday. Weaker wage growth could impact consumer spending and dampen demand-driven inflation. However, the December inflation numbers could overshadow the wage growth numbers.

GBP/USD Reaction to the Consumer Price Inflation Report

Before the UK inflation report, the GBP/USD rose to a high of $1.26438 before falling to a low of $1.25964.

However, in response to the report, the GBP/USD surged from $1.26051 to $1.26438.

On Wednesday, the GBP/USD was down 0.07% to $1.26272.

Up Next: US Retail Sales and Fed Speakers

On Wednesday, US retail sales will draw investor interest. Economists forecast retail sales to increase by 0.4% in December after rising by 0.3% in November. A pickup in consumer spending could fuel demand-driven inflation and delay Fed rate cuts to curb spending.

However, investors must monitor Fed speeches for forward guidance on interest rates. FOMC members Michael Barr, Michelle Bowman, and John Williams are on the calendar to speak.