UK inflation tumbles to lowest on record and is still heading lower

Enrique Díaz-Álvarez14/Jan/2015Currency Updates

GBP

Weak inflation data caused Sterling to fall sharply initially yesterday morning, although the UK currency rebounded strongly to finish 0.1% up versus the Dollar.

UK consumer price inflation plummeted below forecasts to a record low level in December. Pushed down by falling energy prices, the Consumer Price Index halved last month from 1% to just 0.5%, the lowest rate since records started on this measure in 1989. Prices of motor fuels fell by an annualised 10.5%, while supermarket price wars forced food prices down by 1.9% over the same period. An increase in the price of alcohol and tobacco by 1.3% and 7% respectively were not enough to prevent price growth falling for the fifth month in the last six.

The announcement will be welcome news for UK consumers and could lead to a period of “good deflation” recently coined “joyflation”, where cheaper energy boosts individuals spending power and stimulates growth. However, the announcement moves the economy even further away from the 2% inflation target and raises concerns that the UK could follow Europe into a period of deflation. Meanwhile, in contrast, the Core Consumer Price Index, that strips volatile food and energy components, actually rose in December from 1.2% to 1.3%, while retail prices declined from 2% to 1.6%. Speaking after the announcement Bank of England Governor Mark Carney gave a hint that interest rates could be lower for longer than anticipated, although stated there was no need for more monetary stimulus.

Mark Carney will be speaking again this afternoon at the Treasury Select Committee with inflation data likely to be a key talking point.

EUR

The Euro hit another nine year low on Tuesday, plunging by 0.55% against the Dollar.

The fall in the single currency came after ECB Executive Board Member Benoit Coeure was quoted as saying the central bank was “in a position to take a decision” at its January meeting. The ECB is now all but certain to launch quantitative easing at its 22nd January meeting. Significant Eurozone data was in short supply yesterday. Greece and Portugal, however, fell further into deflation at -2.6% and -0.4% respectively. Industrial output in Italy climbed, although still remained negative at -1.8%, while the Wholesale Price index in Germany fell by 2.3% in December.

A number of second-tier releases in the major European economies today, although most attention will be on the European Court of Justice with the issuing of an interim ruling which may limit Mario Draghi’s quantitative easing options at this month’s ECB meeting.

USD

Another solid performance by greenback yesterday saw the US Dollar Index rise by 0.3% during the course of London trading.

An NFIB report yesterday showed small business optimism increased to its highest level in more than eight years in the US. The index climbed to 100.4 in December, up on the previous 98.1, further underlining improving optimism in the health of the economy. More encouraging job data, as job openings rose to their highest level in almost fourteen years in November. Job Openings and Labor Turnover Survey, known as JOLTS, rose to a seasonally adjusted 4.972 million, 15% above pre-recession levels. Elsewhere, the IBD/TIPP monthly Economic Optimism survey climbed above expectations to 51.5 in January, up by 6.4% on previous.

Data out today is expected to show retail sales fell in the US in December. The US Census Bureau figure released at 1.30pm GMT is forecast to fall by 0.1%.

Rest of the world

Sweden’s Krona strengthened against its major peers after inflation data came in better than expected. The country, however, still remains in deflation of -0.3%. The Central Bank of Nigeria loosened rules on the buying and selling of foreign exchange in a bid to boost the Naira, while the National Bank of Poland stated it was in no rush to cut rates even as deflation deepens.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.