UK Inflation Surprises Again: Implications for GBP and Bank of England's Monetary Policy

GBP: Another inflation surprise

GBP: Another inflation surprise

UK inflation surprised on the upside again in May. Core CPI unexpectedly rose from 6.8% to 7.1%, while the headline rate was unchanged at 8.7% despite consensus expecting a decline to 8.4%.

The reason for higher prices is in no small part because of outperformance in services inflation. This will likely concern the Bank of England hawks, and while the chances of a 50bp hike tomorrow still appear limited, this will probably encourage MPC members not to push back against the very aggressive market pricing for further Bank of England tightening. More in our BoE meeting preview.

The FX impact of the CPI surprise was interesting. Sterling jumped but then rapidly erased gains: this probably signals how the room for a further hawkish repricing in the Sonia curve is limited and so are the positive implications for sterling of more data surprises.

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Topics

uk inflation fx impact sterling core cpi tightening market pricing services inflation headline rate upside surprise Bank of England hawks 50bp hike MPC members CPI surprise hawkish repricing Sonia curve data surprises.