Sterling weakened and has stayed weak following this morning’s CPI-inflation data release (unlike yesterday’s wage data whereby Sterling ultimately recovered most of its post-release losses). Headline and core inflation numbers are “cleaner” and easier to digest for markets (and media) than labour market data releases which can often be sliced and diced a thousand ways.
March inflation numbers were weak enough for sterling to drop but market pricing for a May rate hike didn’t move much. Headline and core CPI-inflation fell more than expected by analysts but this would not have come as great surprise for the Bank of England. Sterling has been appreciating in year-on-year terms which has more than countered rising global commodity prices, which has result in falling UK imported inflation. And history shows that when imported inflation falls, headline and core CPI-inflation tends to fall (not unsurprising in an open economy such as the UK’s).
So the Bank of England still seems on course for a 25bp rate hike in May but UK wage, inflation and ultimately GDP data are pointing to a decreased probability of the MPC hiking in H2 2018 – i.e a case of one hike (in May) and done.
