Sterling strengthened following higher than expected inflation numbers. UK inflation jumped to a near-30-year high of 5.4% and economists have noted that inflation will continue to rise.
Inflation is anticipated to exceed 6% in April and come closer to 7% as supply chain issues come to feed through into prices in the shops and domestic energy bills rise up to 50%. The data which was released by the Office for National Statistics will also affect the Bank of England’s decisions, as the Bank is required to keep inflation close to the government’s 2% inflation target and has continually underestimated the recent price pressures. Traders and investors will closely watch the Bank’s meeting in early February, as expectations for an increase in borrowing costs from 0.25% to 0.5% have now increased.
UK CPI inflation for December came at 5.4% year-on-year according to the ONS, beating expectations of a 5.2% reading and surpassing November's number of 5.1%. Core CPI inflation was at 4.2%, higher than the market’s expectation for 3.9%. CPI is now above the Bank of England’s target and the highest since the UK first adopted an inflation target in October 1992. According to the ONS, December's strong inflation numbers were boosted by higher prices in transport, food and non-alcoholic beverages, furniture and household goods, and housing and household services.
Bank of England and interest rate hike
The Bank of England raised rates in December as inflation in the UK rose above the 2.0% target and now markets anticipate another rate rise in February. Markets expect the Bank Rate to reach 1.25% by the end of 2022.
Some analysts believe the pound has further potential to rise following strong employment levels and higher inflation, while others believe that it has reached its highest level.
Inflation to rise further
Economists expect inflation to rise more and to peak in the months ahead, as the energy price cap is raised. With prices on the rise and real wages already falling, households will struggle with the cost of living.
Chancellor Rishi Sunak commenting on today’s data said: "I understand the pressures people are facing with the cost of living, and we will continue to listen to people's concerns."
The government has been urged to find solutions to protect those consumers who will struggle the most as prices continue to rise. The CBI has also called the government to provide support to struggling firms, especially energy-intensive businesses. In the coming months, the release of more data may reflect higher costs being passed from firms over to consumers as they try to maintain their company margins. Higher energy prices and tax rises will contribute to the looming cost of living squeeze. The TUC, which includes 48 member unions, has also called the government to come up with a plan to deal with the UK’s cost of living crisis. TUC general Secretary Frances O’Grady said that families are facing higher inflation pressures and slowing wage growth and need more help from the government.
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