Hot UK CPI data leaves British Pound largely unchanged

• The British Pound holds broadly steady despite volatile trading following the UK CPI release.
• September’s UK inflation readings exceeded forecasts for both headline and core CPI.
• Hawkish BoE expectations could strengthen on the back of robust UK employment and CPI readings.

The British Pound (GBP) is largely unchanged against its peers despite choppy trading following September’s stronger-than-forecast United Kingdom (UK) Consumer Price Index (CPI) release. The currency is also nearly flat against the Japanese Yen (JPY), trading around 211.45.

Headline CPI increased by 3.5% year-on-year (YoY), according to the Office for National Statistics (ONS), exceeding the 3.4% forecast and August’s 3.1% reading. Core CPI, which strips out the volatile food, energy, alcohol and tobacco components, rose by 2.8% YoY over the same period. This was above expectations of 2.7% and the previous reading of 2.6%.

Month-on-month inflation came in at 0.4%, exceeding the projected 0.3% while easing from the previous reading of 0.5%.

Expectations of a Bank of England (BoE) interest rate increase at the November policy meeting are likely to strengthen as the hot CPI figures follow better-than-forecast UK labour market data released on Tuesday for the three months ending August. The BoE has kept its interest rate unchanged at 3.75% so far this year.

Upside risks to inflation were also highlighted on Tuesday by BoE Monetary Policy Committee (MPC) member Megan Greene, who cautioned that second-round inflation effects could begin to emerge.

Could Stalled Wage Disinflation Flagged by BoE’s Greene Keep GBP Rate Hike Risks Alive?

A score of 7.4/10 on the FXS Speechtracker places BoE’s Greene exactly at Greene’s historical average, indicating continuity in tone rather than stronger rhetoric. A distinctly hawkish bias for GBP emerges from the emphasis on wage disinflation having stalled above levels compatible with 2% inflation, coupled with the view that policy should act proactively to counter second-round effects.

The argument for maintaining tight policy is strengthened by Greene’s assessment that second-round inflation risks are greater than previously believed, despite forward-looking indicators suggesting pay growth nearer 3.5%. Her references to unexpectedly resilient economic activity and the possibility that labour market slack has peaked point to limited downside risks to growth. Together, these support the case for continued GBP support as markets factor in a more gradual pace of future rate cuts.

For Japan, attention turns to September’s National CPI release, due on Friday.