Summary:
- UK inflation stays intact in May in line with expectations
- Fuel prices boost PPI input prices for companies, a sign of impending price pressures
- British currency nudges lower, much deeper declines seem to be contained
UK inflation stayed put in May in line with expectations while fuel boosted PPI input prices implying more inflationary pressures to come over the next months. In effect, the pound deepened its slump being the worst major currency at the time of writing.
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A sharp rally in oil prices drove PPI input prices across the manufacturing sector in May. Macrobond, XTB Research
The ONS informed that both headline and core inflation stayed unchanged in May at 2.4% and 2.1% yoy respectively matching economists’ anticipations. At the same time, a massive increase of PPI input prices was witnessed as it jumped 9.2% yoy well above the expected 7.6% yoy. Nevertheless, PPI output prices rose much less impressively to 2.9% from 2.5% in April suggesting that UK companies, on average, have been unable to pass rising production costs on customers as of yet. Either way, once these kind of pressures build up they could be ultimately forced to lift prices in order to offset a squeeze on margins. Looking at the chart above one may notice that CPI core prices moved behind rising PPI input prices with some delay, hence it could repeat itself this time round as well. If so, it could put more upward pressure on the Bank of England to rise rates over time being a possible driver for the stronger pound given that money market participants walk a tightrope between a hike or not a hike - they assign just 50% odds for such a move in August.
Other details of today’s release showed that a factory output prices rise, the largest annual increase since December 2017, was primarily driven by a surge in petroleum product prices as they soared 12.4% compared to a 5.6% rise in April. Upward pressures on price growth came also from air fares and ferry prices. These rises were offset to some extent by computer games prices. To sump up, a set of macroeconomic readings we knew this week might be classified as GBP supportive letting bulls keep hopes that the ongoing pullback against the US dollar may come to an end soon.
The GBPUSD keeps sliding even as inflation came in line with expectations. Taking a glance at the chart above one may hope that the ongoing slide may soon come to an end when the pair reaches 1.3240 being accompanied by a 50% retracement. In this respect, today’s Federal Reserve meeting might be especially important. Source: xStation5
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