UK 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.
What the desk is arguing
The desk frames this as a sign that while inflation is ticking up, it is not yet prompting the Bank of England to alter its current policy stance. Per the latest report from ING, energy prices have risen significantly, leading to a short-term rise in inflation to 3.1%, but there is still no broadening of inflation across other categories like food, where prices have dipped to 1.1% year-on-year.
Key indicators suggest that while inflation expectations may rise as winter progresses, the BoE is likely to remain cautious. The ING commentary indicates that inflation could reach 3.4% next month, but without a ripple effect on other inflation categories, there's little urgency for the Bank to hike rates at this time.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.075, spanning a range from 1.04 to 1.12. Notably, jpmorgan is aligned with this view, targeting 1.10 for March 2026, while bofa diverges, maintaining a more cautious stance with a target of 1.04 for the same tenor.
The desk's interpretation suggests that the market should not anticipate aggressive movements from the BoE, reinforcing the idea that our target may well reflect the market consensus, even as some firms may bank on a more aggressive tightening.
How other firms see it
Firms like jpmorgan and others appear to be aligned with a moderate inflation outlook, suggesting a measured approach from the Bank of England. In contrast, bofa seems to express a more bearish view, indicating potential risks in GBP positioning given their lower target.
As we monitor the Bank of England's responses, watch GBP/USD for potential volatility, especially in relation to overall inflation trends and central bank communications. The trajectory here may reflect broader market moves, including related currency pairs influenced by similar central bank dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK inflation has risen to 3.1%, driven predominantly by higher fuel prices.
- 02Broader inflation pressures remain subdued, with food inflation declining to 1.1%.
- 03The Bank of England may hold off on rate hikes given limited evidence of widespread inflationary effects.
Market implications
Watch for potential GBP/USD fluctuations as inflation data evolves, especially with the expectation of hitting 3.4% next month. Positioning around central bank communications could create volatility ahead of any BoE updates.
Risks to this view
A significant catalyst for a reversal would be evidence of sustained inflation across more sectors, leading the market to favor a shift in the Bank of England's policy stance sooner than anticipated.
Older quick take Quick take Published 07:59 United Kingdom UK inflation inches higher on rising fuel bills UK inflation has risen back above 3%, and higher energy prices suggest that could get to 3.6-3.7% over the winter. For now, though, there’s nothing in the latest data that screams a need to hike interest rates Higher energy prices suggest UK inflation could hit 3.7% over winter Headline inflation edged up to 3.1% on a widely expected 7% month-on-month rise in fuel costs. The weekly data points to another 3-4% rise in petrol/diesel through September, which we expect to help lift headline inflation up to 3.4% in next month’s data.
But this isn’t what matters to the Bank of England – the question is whether the energy shock is broadening out to other parts of the inflation basket. And there is very little sign that this is happening. Take food inflation, which slipped even lower in August to 1.1% year-on-year.
Producer price data suggests this could actually turn negative in the very near term. That feels unlikely given the wider energy shock. But then again, fertiliser costs have retreated, and so far, the sector is displaying signs of strong competition.
In time, we expect food inflation to rise as the full effect of the Iran war feeds through, but that doesn't appear to be the case currently. It’s a similar story when we look at goods and services the Office for National Statistics has previously defined as having ‘high’ or ‘very high’ energy intensity. This covers everything from fruit to air fares, to canteens.
Even stripping out the distortion from last year’s water and car tax hike, we calculate that the inflation rate for these energy-intensive categories has actually fallen this year. This showed no sign of changing in August. There's no sign the energy shock is broadening out Source: Macrobond, ING "> Source: Macrobond, ING Services inflation is similarly reassuring.
The Bank of England’s ‘core services’ metric, which strips out volatile and indexed categories, is tracking a bit higher than the headline services index (which stayed at 3.4% in August). But it remains benign, and given wage growth is similarly contained, we’d expect it to stay that way. All of this serves as a reminder that the UK economy is far less susceptible to second-round effects than it was during the Ukraine shock four years ago.
There’s nothing in today’s data that suggests the Bank of England needs to turn more hawkish. Inflation is currently behaving fairly predictably – which wasn’t the case back in 2022, when the data was consistently coming in above forecasts. Services inflation is under control Source: Macrobond, ING "> Source: Macrobond, ING None of this is to say the Bank of England won’t hike rates this year.
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