Tuesday, August 18, 2015

Surprise rise in UK core inflation | US inflation and FOMC minutes later today

Core inflation measures the rate of price rises in the economy but excludes food and energy from its calculations. It is the figure that is most closely watched by both politicians and Forex market participants. Although food and energy are excluded because of their volatility, they are also the items that are most important to consumers. If food and energy prices are flat or falling, then citizens have more money in their pockets and have a greater likelihood of increasing that other measure of economic positivity, retail sales.

UK inflation figures came out yesterday. While overall inflation rose marginally, it was the rise in core inflation, from 0.8% year-on-year to 1.2% year-on-year, which caught the attention of the market. This is a healthy rise, and raises the prospects of increases in UK interest rates significantly. The target rate of inflation is around 2%, but central bankers are well aware that if it goes beyond that figure, its subsequent rise can be hard to control, which is not good. Hence the increased likelihood of a return to the normality of interest rate increases, which tend to depress inflation.

As might be expected, the Pound Sterling made strong gains against both the US dollar and the Euro when the inflation news was announced.

US inflation and FOMC minutes later today

Two items that are closely related, both to each other and to the fortunes of the Pound, will hit the wires later today. These are US inflation and the release of the minutes of the most recent meeting of the US Federal Open Market Committee (FOMC), in July. The expectations for inflation stateside are for little change, although the outcome in the UK yesterday might have tempered this. The FOMC minutes will, as usual, be closely parsed for indications of when or, more to the point, by how much, interest rates are likely to increase in the USA.

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