British CPI data came in higher than expected, increasing the negative real British interest rate, and sparking an initial drop in the relative value of the British Pound.
March 2022 CPI Data Release
A short while ago, the UK released its monthly CPI data. This showed annualized inflation increasing at a rate of 6.2% which is the highest recorded level since 1992. The rate was slightly higher than the consensus forecast of 6.0% and was a strong increase on the previous month’s annualized inflation rate of 5.5%.
The UK also released core CPI data, which is drawn from price changes in a narrower basket and is seen by many analysts as a more reliable inflation indicator. The data here were very similar to the wider CPI numbers. Annualized core CPI is increasing at a rate of 5.2%, slightly higher than the consensus forecast of 5.0%, and a strong increase from last month’s number of 4.4%.
This data reinforces the clear trend we see in G7 nations of historically high and increasing levels of inflation, with momentum continuing in the rise.
Reaction to UK CPI Data
Many market analysts were already expecting UK CPI to reach as high as 8% in April, due to rises in energy prices which had already been announced but have not yet taken effect. The Bank of England has said it expects inflation to peak at about 7% in the second quarter of this year. Today’s overshoot plus the inflationary impact of the war in Ukraine can be expected to harden these expectations, making inflation even higher than 8% more likely.
The data increases the likelihood that the Bank of England will hike rates again at its April meeting. However, the release barely affected British markets: the GBP/USD currency pair dropped by barely 15 pips during the first half hour following the release. The major British stock market index the FTSE 100 lost a little value, but this was well within the normal range of fluctuations.
What Does This Mean for Traders?
The high inflation data from the UK is most interesting as a general phenomenon occurring in the most developed countries, rather than as something specific to these markets or currencies. It shows that inflation is increasing worldwide, and its momentum does not yet seem to be slowing.
Another implication of the current combined high inflation / low interest rate environment is a negative real interest rate. A saver in the United Kingdom, for example, can only receive a very low risk-free return, while inflation currently erodes the value of each Pound by 5.45% every year. This effectively forces everyone to either accept the depreciation of their savings or to become a speculator. This may make precious metals such as Gold more attractive, and we have recently seen the price of Gold break to multi-month highs. Gold has historically tended to perform well during periods of high inflation and negative real interest rates.
Over the short-term, today’s CPI data may have given the Pound some impetus to begin moving lower on intraday charts, so short trades in the GBP/USD currency pair or GBP crosses against the Pound could be interesting to day traders now.