This morning’s slate of UK inflation data will likely come as a significant relief to Bank of England Governor Bailey, and to beleaguered Chancellor Reeves.
The data showed headline prices rose 2.5% YoY in December, a touch below market expectations, albeit in line with the Bank’s November forecasts. Meanwhile, underlying inflation metrics pointed to price pressures softening a touch, with core CPI rising 3.2% YoY, and services prices rising 4.4% YoY, the latter being considerably below the Bank’s aforementioned expectations, and the lowest level since March 2022.
While, clearly, inflation remains north of the Bank’s 2% price target, and underlying metrics point to continued signs of some degree of inflation persistence, this morning’s data is nonetheless likely to result in a sigh of relief being breathed on Threadneedle Street, and on Whitehall.
Furthermore, the figures cement expectations that the MPC will deliver this cycle’s third 25bp cut at the February meeting, continuing with a regular quarterly cadence of rate reductions, a somewhat more cautious pace than that seen from the BoE’s G10 peers. Given the Bank’s continued focus on signs of inflation persistence, further disinflationary progress will need to be seen in the core and services metrics in order to unlock a faster pace of easing; signs which, at present, remain elusive.
From a markets perspective, this morning’s figures are also likely to see some relief in Gilts, which are set to gain ground at the open. These gains, however, seem set to prove relatively short-lived, as concerns over the UK’s fragile fiscal backdrop, and Chancellor Reeves’s lack of fiscal headroom, persist, resulting in a higher risk premium continuing to be priced into UK assets.
