Headline Consumer Price Inflation for August rose by 0.3% to 2.9%, higher than market expectations of 2.8% and the Bank of England’s (BoE) own projection of 2.7%. This was the highest reading since 2012! Core inflation at 2.7% and Retail Price Index at 3.9% were also stronger, with weaker Sterling and rising oil prices being the most obvious contributors. There is now a risk that inflation will rise beyond 3% in the last quarter of the year.
The unemployment rate released on Wednesday fell to 4.3% during April, May and June, a 42-year low, although hopes for wage growth to accelerate did not materialise this time.
Both of these releases spiced up the Monetary Policy Committee meeting on Thursday.
As expected, the BoE voted 7-2 to leave interest rates unchanged at 0.25%. The asset purchase target was unanimously kept at the same level, however, the decision was coloured with the most hawkish commentary in recent history. The minutes of the meeting suggested a majority of policy makers could back a rate hike in “coming months” should the hard data confirm their forecasts.
The November meeting has suddenly gone “live”. It will be a Super Thursday, meaning that the BoE will also release its quarterly Inflation Report with its latest view on the state of the economy. By one measure, the odds of a hike in the next two months have risen to more than 60%, from 40% earlier on Thursday. A rate rise is now fully priced in for February 2018.
Data for the labour market, GDP and progress on Brexit negotiations in the coming weeks will all be watched closely, and the bar for an increase seems quite low now.
Sterling reacted promptly, rising 3% against the Dollar over the last week, also making it the best performing major currency this month. It now stands at the highest level since 27 June 2016, four days after the EU Referendum. The yield on the 10 Year Gilt rose 33 bps since last Thursday, approaching the top of its recent range.
Is it a real thing? Are these the signs that a long awaited yield normalisation may finally commence or is it another false dawn? Given history, ongoing Brexit uncertainty and fragility of the economy, it would pay to be sceptical. The move higher in Sterling and yields may quickly run into resistance.