The United Kingdom (UK) Office for National Statistics (ONS) will publish the highly relevant Consumer Price Index (CPI) data for September on Wednesday at 06:00 GMT, with markets expecting an uptick in inflationary pressures.
UK consumer inflation is a key release for the Bank of England (BoE) and has a significant impact on the Pound Sterling (GBP). The central bank’s Monetary Policy Committee meets on November 6, and Wednesday’s inflation readings will be the last ones ahead of the interest rate decision.
What to expect from the next UK inflation report?
The UK headline Consumer Price Index is forecast to have accelerated to a 4% annual rate in September* from the 3.8% YoY seen in August. If these figures are confirmed, it will be the strongest inflation reading since January 2024, and twice as high as the BoE’s 2% target for price stability.
Source: National Statistics
The UK core CPI, considered more relevant for the central bank, as it strips off the seasonal impact of food and energy prices, is also expected to have heated, although at a milder pace. The UK’s core inflation is seen at 3.7% YoY in September, from the previous month’s 3.6% reading.
Monthly inflation is expected to have risen 0.2%, both headline and core CPI, following 0.3% advances in August.
Together with consumer inflation, National Statistics is expected to release the Retail Prices Index numbers, which are also expected to have picked up to a 4.7% YoY growth last month, from 4.6% in August. The Bank of England’s Chief Economist, Huw Pill, has endorsed this view, affirming that the bank “needs to recognise CPI stubbornness as more pressing,” and that “a more cautious pace of withdrawing monetary policy restrictions than seen over the past year may be appropriate.”
How will the UK Consumer Price Index report affect GBP/USD?
A 4% inflation reading, as the market consensus anticipates, is likely to trigger a significant repricing of the Bank of England’s monetary easing prospects, which might provide some support to the British Pound.
Data released in previous weeks revealed that the UK labour market is stabilising, following declines in payrolls and vacancies earlier this year. National Statistics numbers showed that the Unemployment Rate ticked up to 4.8% in the three months to August, and net employment increased by 91K, following a 232K increment in July.
Beyond that, Gross Domestic Product (GDP) bounced up to 0.1% in August, buoyed by a 0.7% growth in Manufacturing Production. This reading partly reverses the 1.1% contraction seen in July and beats expectations of a 0.4% growth.
All in all, the figures reflect a solid economy that copes well in the face of an uncertain global trade scenario, allowing the Bank of England to hold rates at the current levels for some time.
At their latest monetary policy meeting in September, the UK central bank left its benchmark interest rate at 4%, with two dissenting members voting for a further rate cut. The meeting minutes already highlighted a more cautious approach to monetary easing amid persistent inflation risks.
In this context, a strong CPI, 4% or higher, would curb hopes of further rate cuts in the coming months and might give the Pound an additional impulse. Softer-than-expected data, on the contrary, might keep hopes of further monetary easing alive and add pressure on the GBP.
GBP/USD 4-hour chart
Regarding the GBP/USD pair, FXStreet analyst Guillermo Alcalá sees price action correcting lower after peaking at 1.3470 last week: “The GBP/USD recovery has been capped at the 1.3470 area, and the pair has been trading lower ever since, with the 61.8% Fibonacci retracement of the mid-October rally, at 1.3335 emerging as a plausible target for a bearish correction.”
On the upside, Alcalá sees a significant resistance area between 1.3470 and 1.3490: “Bulls, on the contrary, have remained capped below 1.3445, but the key resistance remains in the area between October 17 and 7 highs at 1.3470 and 1.3490, respectively.”
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Economic Indicator
Consumer Price Index (MoM)
The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is also the inflation measure used in the government’s target. The MoM figure compares the prices of goods in the reference month to the previous month. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.
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