FxPro Forex Analysis: UK CPI surge

The thing that stands out regarding the UK inflation numbers is that the rise from 1.6% to 1.9% was owing to a fairly broad-based increase in prices. Of the twelve main categories, only one saw a decline in the YoY rate.  The main upward push came from clothing and footwear prices (adding 0.18 to the 0.3 increase in headline CPI), with food, together with transport also adding to the upward pressure.  It can be that the timing of sales can affect shop prices this time of year, so we may see some of this reversed next month.  That said, if retailers are discounting less and not as early as last year, that could well be a sign that they are taking advantage of the better trading conditions to increase margins, which have been squeezed extensively in recent years.  The sterling reaction is understandable (GBPUSD half a point higher to 1.7140), given that this is the biggest upside surprise to CPI for  nearly 2 years.  Indeed, we’ve only seen 3 upside surprises in the past 21 months.  In other words, markets have become very used to tame UK inflation.  Today’s numbers have acted as a reality check and added further weight to the case for a tightening from the BoE this year.