UK inflation comes back below BoE price target

Summary:

• UK headline price growth decelerates more than expected in the first month of 2019

• Core prices stayed unchanged, the data confirms the current wait-and-see BoE stance

• GBP little changed, the EURGBP could see a jump in the nearest future

Price pressure fades

UK price growth slowed down more than expected in January signalling the BoE is right in staying on hold with interest rates. The British pound was barely changed immediately after the data as major focus is still on a Brexit thread.

UK headline price growth came back below the BoE’s target for the first time in two years. Source: Macrobond, XTB Research

The data released by the ONS showed headline price growth slowing to 1.8% YoY from 2.1% YoY in December, below the expected 1.9% YoY. Simultaneously, core prices growth held at 1.9% YoY matching the median estimate. While these figures could be a boost for consumers, along with wage growth rising at a faster clip recently, they also justify the current stance of the Bank of England to stay put. Downward pressure on price growth in January came from lower fuel, gas and electricity prices - all these categories are excluded from core inflation. Note that a sudden decrease in electricity prices came after the energy regulator had capped undue price rises since the start of 2019. Although the British pound keeps trading well below its ‘fair value’ (we estimates this value by using a REER approach) the outlook for it remains blurry. The greatest culprit is obviously Brexit which has already hindered investment spending and pushed many institutions out the United Kingdom. While the GBP might see sudden jumps from time to time, the more sustained appreciation is unlikely until the Brexit thread clarifies. By and large, we reckon that the downside risk for the pound from current levels is limited, thus the risk/reward seems to be positive for the currency even if Brexit-related uncertainty is taken into consideration.

Technical outlook