UK inflation is up, but there’s still no sign of second-round effects
At a Glance
The desk interprets the recent commentary on UK inflation as indicative of a temporary environment, given the lack of second-round effects despite rising energy prices. Per the full note from ING, inflation is expected to reach 4% this winter, yet these pressures have not translated broadly into other sectors. This observation provides a solid grounding for the potential Bank of England rate hikes slated for November and February, with the expectation that cuts may follow by the end of 2027 if inflation dynamics remain subdued.
Key Takeaways
- 01UK inflation expected to hit 4% this winter
- 02No signs of second-round inflation effects observed
- 03Food prices showing unexpected declines
- 04Potential rate hikes by BoE could shift market dynamics
Full Analysis
What the desk is arguing
The desk contends that the current inflation environment in the UK poses minimal risk of significant second-round effects, supporting the view that the Bank of England's rate trajectory may be more cautious than aggressive. Per the full note from ING, food inflation has notably remained low, with a month-on-month decline in prices, which contradicts typical inflationary responses to energy price spikes.
Additionally, the commentary highlights that the 'energy intensive' inflation gauge, which covers various high-energy-use sectors, has not shown significant upward movement this year, suggesting that Governor Bailey’s rate hikes may not have the desired impact on curbing inflation. With headline inflation at 3.5% in September aligning with ING's projections, the risk of inflation spiraling out of control appears limited.
As the commentary suggests, absent a broader spillover from energy costs into the inflation basket, the Fed may have room for a more measured approach in their interest rate policy moving forward.
Where it sits in our coverage
Our consensus target for GBP/USD sits at 1.075, within a range of 1.04 to 1.12. Specific Dec-26 targets from notable firms include: - jpmorgan: 1.10 - bofa: 1.04
This desk's view is in alignment with jpmorgan, which holds a relatively higher target, though it diverges from bofa, which appears more cautious in its assessment of inflation's impact on currency strength. Our position sits at the upper bound of the agreed range, suggesting a bullish outlook relative to some competitors.
How other firms see it
Market sentiment is somewhat mixed. Firms like jpmorgan and others appear aligned with our optimistic perspective on the stability of inflation, while bofa offers a more bearish stance, anticipating potential downward revisions should inflation data surprise to the south.
Traders may want to monitor how the GBP/USD pair reacts to news surrounding BoE monetary policy decisions. Equally, the USD/JPY trajectory will be significant as shifts in Fed policy are conveyed in global currency markets.
Market Implications
Traders should keep an eye on the GBP/USD as it aligns with anticipated BoE policy changes, monitoring levels around 1.075. Any surprises in inflation data could alter this outlook significantly, particularly with potential rate hikes ahead.
From the original
Older quick take Quick take Published 07:50 United Kingdom UK inflation is up, but there’s still no sign of second-round effects Inflation is on course to hit 4% this winter. But there's still very little sign that the rise in energy prices is spilling into other parts of the inf
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4 itemsUK inflation inches higher on rising fuel bills
The desk interprets the recent uptick in UK inflation, driven by higher fuel costs and projected to potentially rise to 3.6-3.7% over the winter, as not yet alarming for the Bank of England. Per the full note from ING, although headline inflation has recently crossed 3.1%, crucial components like food inflation appear stable or even declining, which may reduce pressure for immediate rate hikes. The lack of broad-based inflationary signals allows the BoE to maintain a wait-and-see stance, potentially influencing GBP positioning amidst upcoming trades.
Bank of England some way off a rate hike despite energy price spike
The desk interprets the Bank of England's position to keep rates on hold, despite rising energy prices, as a signal of a cautious approach to monetary policy. Per the full note from ING, the BoE is unlikely to hike rates at the upcoming meeting on July 30, with expectations of inflation peaking at around 3% later this year, which remains well below their 4% trigger level for significant second-round effects. Although recent energy market surges pose a challenge, they are not considered sufficient to warrant an immediate rate adjustment, likely preserving the current rate environment and keeping traders on alert. With no high-impact events slated on the economic calendar in the next few weeks, the potential for a change in sentiment seems limited at this time.