Pound sterling against the US dollar (GBP/USD) was able to reverse the downward trend it entered from the beginning of today’s trading and rose by about 0.15%.
The pound’s gains today came after stronger than expected growth in inflation, in addition to the rise in gilt yields to their highest levels in more than a month.
December’s Consumer Price Index (CPI) readings, which were stronger than expected, should help reshaping markets’ expectations about the path of interest rates this year.
These inflation figures would also encourage the Bank of England to adhere to its declared hawkish stance that there will be no cut in the interest rate soon, especially with increasing fears about the upward risk of inflation as a result of what is happening in the Middle East.
Despite the stronger-than-expected growth in CPI, Producer Prices Index (PPI) readings, especially input prices, also contracted more than expected at the same time, supported by lower prices for energy products, which may remain hostage to developments that may occur in the Middle East as well.
PPI figures numbers, in turn, may also remain the most important factors for markets to adhere to expectations of an early interest rate cut and that inflation is actually on the right path towards its goals in the end.
In detail, last December, CPI inflation was at 4% on an annual basis, which is contrary to expectations for a decline in inflation to 3.8%. On a monthly basis, inflation reversed the course of deflation and grew by 0.4%, which was also higher than expectations for growth of 0.2% as well, which is the first positive reading since last September.
Thus, inflation will have declined and increased by 7.3% in the year 2023 compared to the year 2022, which recorded growth of 9.1% in turn.
While the largest contributor to the rise in inflation in December was the continued rise in food prices, by 0.5% on a monthly basis and 8% on an annual basis. But although food prices rose in December, they were significantly lower than the peaks we witnessed over the past year, at more than 19% in March, and the annual growth in December was the lowest since April 2022.
Transportation and health prices also witnessed a continued rise by 0.6% and 0.5%, respectively. However, transport prices were 1.3% lower year-on-year in December. The prices of services as a whole witnessed a remarkable growth of 0.9% on a monthly basis and 6.4% on an annual basis as well.
As for core inflation, which excludes volatile food and energy items, it maintained its annual growth at 5.1%, but what was noteworthy was the highest monthly growth since last May at 0.6%.
In producer prices, input prices contracted significantly more than expected by 2.8% in December, at the fastest pace since last July. On a monthly basis, input prices also contracted at the fastest pace since June, by 1.2%. Output prices grew slightly by 0.1% on an annual basis, but they contracted on a monthly basis by 0.6%, at the fastest pace since last May.
While the greatest pressure on input prices to decline came from the decline in crude oil and natural gas prices by 12.4% on a monthly basis and 10.2% on an annual basis, in addition to the continued decline in chemical prices by 8.5% on an annual basis. In contrast, imported food prices rose significantly by 2.7% on a monthly basis and local by 0.5%.
This decline in input prices was also offset by a contraction in output prices, especially in processed petroleum products, by 8.2% on a monthly basis. While food prices remained stable and unchanged compared to last November and increased by 1.8% compared to December 2022.
In bond markets, a larger-than-expected rise in CPI has led to record new highs for gilt yields this year. The yield on ten-year gilts reached 3.924%, the highest in more than a month.
This also came with further rises in US Treasury bond yields, with the continued hawkish tone by Fed’s officials and talk that there will be no cutting in interest rates soon. While the yield on ten-year Treasury bonds reached 4.079% at the peak of today’s rises.