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Sterling jumps again after inflation surges to 4.2%

a pound coin

The pound received another modest lift this morning after UK CPI jumped by 1.1% in October to 4.2% and its highest level in almost 10 years.

Retail prices also rose sharply, rising to 6%, and above their 2008 peaks to their highest levels in over 30 years, while PPI input prices rose to 13%, the highest levels in 13 years, which suggests that more price rises are coming down the line as we head towards year end.

Today’s data is a huge embarrassment for the Bank of England whose procrastination over a modest 0.15% rate rise earlier this month, now makes it odds on that all the pre-Christmas headlines will be of the Bank of England steals Christmas variety, if they do bite the bullet and belatedly nudge rates higher.  

Talk that a modest 0.15% is somehow a policy mistake is also nonsense of the highest order, even allowing for the fact that a lot of these price rises are to do with supply chain disruptions. You can acknowledge all of that, while at the same seeing that with all of that stripped out, inflation is still likely to be running higher than the Bank of England’s 2% target, and as such need to be moved off their current emergency settings.

There is also the question of what the optimal interest rate for the UK economy is, when inflation is running this far above trend. It’s probably higher than the current base rate of 0.1% and begs the question of if the Bank of England doesn’t nudge rates higher after this sort of data, then it probably never will.

The last two days data shouldn’t have been too much of a surprise to most people, there’s been plenty of anecdotal evidence to support a resilient labour market, as well as higher prices, which makes the decision to delay earlier this month even more puzzling.

None of the above has been a surprise to most people and would have saved the Bank of England a lot of the aggravation and grief they were on the receiving end of a couple of weeks ago.

As with everything with central bank communications it’s all about delivery, the Bank of England could have delivered on a rate rise, while playing down expectations of the next one.

For now markets are cautiously increasing bets that the Bank of England will deliver next month, however there is also the muscle memory of being bitten once too often. This time the central bank needs to deliver in a way that markets can absorb without too much volatility. Maybe the should give the Federal Reserve a call for advice?

Now it’s a question of, over to you Mr Bailey, and whether markets believe any forward guidance you now give.


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