The UK's inflation story is a complex one, and it's about to get even more intriguing. As the Consumer Price Index (CPI) data for January is released, markets are abuzz with anticipation. But here's where it gets controversial: while the headline inflation might be cooling down, the core CPI, which excludes volatile food and energy items, is still a key figure to watch. And this is the part most people miss...
The UK's headline CPI rose 3.0% over the year in January, down from 3.4% in December. This was in line with market predictions, but it's the core CPI that's really making waves. It climbed 3.1% year-on-year, compared to December's 3.2%, and this is where the real story lies. But why is this important? Let's break it down.
The core CPI is like the central bank's favorite barometer. It measures the change in prices of a basket of goods and services, excluding the volatile food and energy items. This is the figure economists focus on, and it's the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
So, what does this mean for the UK economy? Well, the Bank of England (BoE) has stated that price pressures are expected to ease to around 3% in Q1 2026, and closer to 2% in Q2. This is good news for the BoE's inflation target, but it's also got investors on edge. Why? Because it's a delicate balance.
The BoE's dovish expectations have accelerated following the release of the UK labor market data for three months ending in December. This showed a higher jobless rate and moderate wage growth, which is a double-edged sword. On the one hand, it's good for the job market, but on the other, it could lead to higher inflation if wages keep rising. So, what's the verdict?
As for the GBP/USD, it's trading slightly lower at around 1.3556 as of writing. The 20-period Exponential Moving Average (EMA) trends lower, and the price is holding beneath this gauge, maintaining a short-term bearish bias. The 14-day Relative Strength Index (RSI) at 39 (below 50) reflects subdued momentum and favors sellers. But what does this mean for the future?
The overall outlook of the price is bearish as it holds the breakdown of the Symmetrical Triangle formation, also known as the Volatility Contraction Pattern (VCP). This could lead to wider ticks and heavy volume on the downside. Looking down, Cable could extend its decline towards the round-level figure of 1.3400 if it breaks below Tuesday's low of 1.3500. So, what's next for the UK's inflation story?
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel, which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2%, it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.
