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Pound Declines Despite Rise in Annual Inflation

By Benjamin Spier
18 June 2013 09:18 GMT

THE TAKEAWAY: UK inflation rises to 2.7% in May -> BoE forecasts 3.1% inflation in Q3 -> Pound declines despite higher than expected inflation

UK inflation rebounded in May beyond expectations and above the Bank of England’s target inflation rate. Consumer prices rose 2.7% from May 2012, beating expectations for 2.6% annual inflation and above April’s 2.4% inflation rate. Consumer prices rose 0.2% over the month of May, according to the UK Office for National Statistics.

However, input producer prices fell 0.3% over the month of May and were only up 2.2% from May 2012. Meanwhile, ONS House prices rose 2.6% from April 2012. Transport costs had the biggest upward contribution to consumer prices, because of a rise in air transport and motor fuels. The largest downward contribution to inflation came from food.

The annual inflation rate remains above the Bank of England’s 2% inflation target, and the BoE forecasted in April that inflation will reach 3.1% in the third quarter of this year. However, it is unclear if the central bank will respond to the higher inflation rate, as incoming governor Carney said he prefers a flexible inflation rate. Carney will lead his first BoE meeting in July, and he is expected by some to also push for an increase to monetary stimulus, as had his predecessor.

Higher than expected inflation is expected to provide a reason against raising monetary stimulus and therefore push the Pound higher. However, the Pound did not react to the inflation report, and continues to trade below 1.5700. GBP/USD may see support near 1.5595, by a previous level of resistance.

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GBPUSDDaily: June 18, 2013

Pound_Declines_Despite_Rise_in_Annual_Inflation_body_gbpusd.png, Pound Declines Despite Rise in Annual Inflation

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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18 June 2013 09:18 GMT