Inflation in the UK Cools Down – Paxforex

Inflation cooled down in the UK last month which took forex traders by surprise. The British Pound halted its advance and all eyes are on today’s release of minutes by the Bank of England. Expectations for an increase in interest rates has increase over the past few trading weeks which helped the British Pound rally against major currency pairs. Yesterday’s disappointment in inflation figures may give the Bank of England more time before they act on interest rates and forex traders may take further profits in the trading days ahead.

Consumer prices contracted by 0.1% in May while economists expected an increase of 0.2% which would have followed April’s 0.4% advance; annualized consumer prices rose 1.5% in May missing forecasts for an increase of 1.7% after April’s 1.8% rise. Annualized core consumer prices rose by 1.6%, missing forecasts for an increase of 1.7% and easing from April’s 2.0%.

Producer prices showed a much bigger contraction and were deflationary as producer input prices contracted 0.9% in May for an annualized contraction of 5.0%. Economists were looking for a much smaller contraction of 0.1% on a monthly base and a 4.3% contraction annualized. April’s figure were revised higher and now show a contraction of 0.9% monthly and 5.3% annualized.

Producer output prices contracted 0.1% missing estimates for an increase of 0.1% in May. April was revised upward to show an increase of 0.1%. Annualized producer output prices rose 0.5% missing estimates for an increase of 0.7% and below April’s 0.6% gain. Core producer output prices contracted by 0.1% monthly and rose 1.0% annualized. This missed estimates for a gain of 0.1% monthly and 1.1% annualized.

The Bank of England has an inflation target of 2.0% and May’s inflation report is moving in the wrong direction for the Bank of England to move on interest rates. This could pressure the British Pound and we may witness a minor correction until more economic data points towards an increase in inflationary pressures rather than a contraction or in isolated cases deflationary pressures.

Written by Paxforex