UK Inflation cools, but the issue is far from being resolved

The latest UK inflation report for April presented a mixed picture. While there was a welcome decrease in headline CPI (Consumer Price Index) from double digits to 8.7% on an annual basis. The decline was not as significant as anticipated by the markets which had expected a larger drop to around 8.2%.

Additionally, a concerning development for the Bank of England (BoE) was the increase in core inflation from 6.2% to 6.8% on an annual basis during the same period.

This news is likely to keep pressure on the BoE to continue raising UK interest rates. Following the release, there was an immediate positive reaction in the currency markets, with the pound strengthening against both the US dollar and the euro.

UK Inflation - Key Points

Headline CPI

The annual headline CPI decreased from double digits to 8.7% in April, providing some relief. However, the decline fell short of market expectations, which had hoped for a larger decrease to around 8.2%.

Core Inflation

The report revealed an increase in core inflation from 6.2% to 6.8% on an annual basis, raising concerns for the Bank of England. Core inflation excludes volatile factors like food and energy prices and is considered a more stable measure of long-term inflation trends.

BoE's Pressure: The rise in core inflation is likely to put continued pressure on the Bank of England to pursue further interest rate hikes. The central bank's objective is to control inflation and ensure economic stability.

Currency Impact

The pound experienced an immediate positive reaction in the currency markets following the release of the inflation report. GBP/USD crossed the 1.2450 level, rebounding from its lower position below 1.2400 the previous day. Similarly, GBP/EUR showed upward movement, surpassing the 1.1550 mark.

Our Thoughts

The April UK inflation report presented a mixed bag of results. While there was a decrease in headline CPI, it fell short of market expectations. The concerning increase in core inflation is likely to keep the pressure on the Bank of England to continue raising interest rates. The positive currency market reaction was reflected in a strengthening of the pound against both the US dollar and the euro.

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