The pound was little changed on Wednesday following data that showed UK inflation soared to its highest level in more than four decades last month. This has left the Bank of England (BoE) in a catch-22 situation, with its attempts to cool inflation by hiking interest rates increasing the risk of a sharper economic slowdown.
Consumer price inflation in the UK rose to a 40-year high of 10.1% in July, according to estimates published by the Office for National Statistics (ONS), above the consensus forecast of 9.8% and up from 9.4% in June.
The larger-than-expected increase tightens the grip on household spending and intensifies concerns that price pressures may become entrenched in the economy. It also reinforces investor bets that the BoE will deliver a second consecutive 50 basis point rate rise in September.
The producer price index – released in tandem with the CPI – provided evidence of a cost of doing business crisis. Producer output – also known as factory gate output – prices increased by 17.1% in the year to July, its highest since August 1977 and up from 16.4% in the year to June. Producer input prices increased by 22.6% in the year to July.
The inflation figures were accompanied by the retail price index from the ONS, which showed that prices increased 0.6% in July from the previous month on a non-seasonally adjusted basis. The annual rate of retail price inflation reached 12.3% – its highest level in over 40 years.
Dollar little changed ahead of Fed minutes
The dollar was steady on Wednesday ahead of US retail sales data and minutes from the Federal Reserve’s July meeting.
US retail sales remained unchanged last month amid falling gasoline prices, but consumer spending appeared to be firm, which could calm fears that the domestic economy has already slipped into recession.
The Commerce Department reported on Wednesday that retail sales were flat in July having risen 0.8% in June. Economists had forecast a slight increase in July sales.
Looking ahead
The Fed publishes the minutes from its 26-27 July policy meeting later on Wednesday. Their contents could provide clues about the future pace of the central bank’s rate hiking cycle.
Initial jobless claims for the week ended 13 August and the Philadelphia Fed manufacturing survey for August hit the headlines in the US on Thursday.
The GfK consumer confidence print for August – which remained at a 48-year low in July – is published in the UK overnight on Thursday.
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