UK Inflation Slips To BoE Target

CPI in the UK dipped lower in December to 2.0%, the lowest since December 2009. The slip from 2.1% in November 2013 was primarily due to a fall in food prices from 2.8% to 1.9% in the last month.

Considering the recent price wars within the retail space, discounts in the lead up to Christmas would have been a major factor in lowering inflation.

Bank of England governor Mark Carney and his forward guidance policy plays a major part in the forward looking economy, however this dovish note will having policy makers agenda for an increase in interest rates decelerated.

In addition to this unemployment, currently at 7.4%, needs to fall to 7%, however some traders have been factoring in 6.5% before considering an interest rate rise.

Things to consider looking forward are increasing prices for gas and electricity and rising prices at the pump despite oil prices dropping. These rising prices will have a strong impact on increasing inflation. However retailers are trying to entice customers by price freezes. Households could start to feel at ease as average pay rises could start exceeding inflation.

The markets reacted as one would have expected with a sharp drop in sterling, however this has recovered since then. The GBP/USD and EUR/GBP bounced from the 1.6400 and 0.8300 handles respectively.

Overall, I feel this is hugely positive for the UK, providing this stabilises and doesn’t fall to 1.8% or below. It shows the Monetary Policy Committee is going about things in the correct way. Timescales are often overlooked, it was never going to happen overnight and this is starting to create solid confidence in Threadneedle Street. The balance in labour markets and inflation will need to be closely monitored and ensure balance is maintained.

Looking across the waters, inflation has been decreasing in many developed economies, such as the Euro. This week we have European and US CPI.

The US inflation expectations have increased significantly to 1.5%, up from 1.2% in November 2013 and highest since May 2013. This is based on the improving American economy, which is leading the way by commencing its tapering program.