Falling UK CPI: a cause for bearishness on sterling?

16th December 2014 By: Ranko Berich

UK CPI – 16/12/14

The UK CPI data shows a fall in headline inflation to one per cent year on year in November; mostly caused by falling oil prices and a continued drop in food. This could be a cause for bearishness on sterling, providing a reason to delay rate hikes, but the Bank of England is actually fairly bullish on the UK’s macro economy. Carney himself described the fall in oil prices as ‘unambiguously good’ for the economy.”

GBP/USD is showing signs of stabilising, having fallen almost 10 per cent since reaching a high of 1.7192 in July of this year. The next few weeks are now crucial for determining if the downward trend will continue. The present trading range would suggest that USD’s appreciation against GBP will slow in the medium term, especially with the UK economy showing signs of developing real wage growth.”

If the economy shows signs of overheating, the Bank of England may well be willing to overlook this fall in headline inflation. December’s Average Earnings data will be crucial for sterling, and if wages convincingly rise above inflation, it will be the first true sign of tightness in the post-recession labour market.