The United Kingdom’s inflation landscape is set to shift significantly. The deeply awaited Core Consumer Price Index (CPI) numbers for December are right around the corner. We expect the Office for National Statistics (ONS) to release key figures in the coming months. Whether you’re an economic analyst, policymaker, or investor, these statistics are incredibly important. In December, the headline UK CPI is expected to climb back up to 3.3% YoY from 3.2% in November. This shift, along with other developments, points to a likely consumer price inflation rebound in coming months.
Central to this unfolding is, ironically, the centrality of inflation itself as a key input for the Bank of England (BoE). The Federal Reserve likely pays close attention to changes in inflation, since big spikes could alter the course of monetary policy. Inflation increases tend to put a lot of pressure on the British Pound (GBP). Because of this, it has become a go-to metric for traders and economists alike.
Understanding Core CPI and Its Importance
The UK Core CPI measures the average change in prices paid by consumers for a specified basket of goods and services. It deliberately excludes volatile items such as food and energy. This metric, which is released monthly, offers a better look at the core inflation building up underneath our economy. The upcoming report indicates that month-on-month inflation is anticipated to rebound by 0.4%, reversing the previous month’s decline of 0.2%.
We’ll see as core CPI is expected to jump to 0.3% this month. This comes after a 0.2% dip in November. These numbers point to an overall weathering of consumer prices after a recent storm of volatility. It is the stabilization function that is essential for economic health.
As inflation climbs higher, so too do concerns that the Bank of England’s current monetary policy is inadequate. Usually a persistently higher than central bank’s desired levels, in this case 2%, of inflation would call for a tightening of monetary policy through interest rate hikes. Central banks are mostly independent institutions that aim to defend price stability. When inflation increases, they frequently raise base lending rates to combat it.
Implications for Wage Growth and Market Expectations
Alongside the rise in inflation expectations, wage expectations have recently started to trend upwards. One-year-ahead expected wage growth rose to 3.7%, up from 3.6% previously. We have seen realized pay growth mired in the mid-4% range. This indicates that even with higher expectations, wage growth in reality has not followed suit.
Market analysts have been focused on these developments, especially with regard to the implied interest rates. Trade now expects a little more than 42 basis points of easing this year. At the same time, most are already betting on a hold from the BoE next month. This environment breeds confusion for consumers and investors alike as they try to avoid or take advantage of what may be a rapidly changing economic landscape.
“In case bulls regain the upper hand, the YTD ceiling at 1.3567 (January 6) should emerge as the immediate up barrier. North from here, there are no resistance levels of note until the September 2025 high at 1.3726 (September 17)” – Pablo Piovano.
Currency Movements and Market Reactions
Thus, future CPI data will be of utmost importance to the GBP/USD exchange rate. Since then, this rate has been under pressure, sinking to three-year lows close to 1.3340 as of January 19. Traders are looking ahead to inflation readings. A hawkish report would likely lift Sterling, pushing it higher against the Dollar, while a softer release may see further Pound declines.
Analysts are looking at potential support levels if weakness continues in the GBP. Pablo Piovano noted that “Further weakness from here could expose a move toward the interim support at the 55-day SMA at 1.3309 ahead of the December floor at 1.3179 (December 2).” These levels could serve as important warning signs of impending market movements in the foreign exchange markets.
As December’s inflation data grows closer, stakeholders on all sides continue to watch closely for what it may signal for economic policy and currency stability. Our upcoming report will shed light on whether inflationary pressures are abating or whether more action is needed.