**As seen in Risk In The Week report 10/13/23, subscribe at cablefxm.co.uk/reports
U.K. August consumer prices shocked expectations as the headline printed at 6.7% Y/y vs the consensus forecast of 7.0%, this was a slower pace than the prior 6.8%. Core CPI fell to 6.2% Y/y from the prior 6.9%, economists had been expecting the figure at 6.8%. The closely watched services inflation metric rose by 6.8% Y/y, this was the slowest pace since April. On the month, services prices eased to 0.0% from 1.5%, this was the slowest pace since January. Housing prices slowed to 0.3% from 1.5%, and transport prices deflated by 0.4% from an increase of 7.0%. The metric measuring food prices increased 0.7% M/m from a prior 0.2%, this was the fastest pace since May. August energy prices jumped by 1.7% M/m, this was the first increase since November. The report was released one day before the BoE decided on monetary policy, the sharp downside surprise and the fact that services prices did not extend higher gave rise to expectations of a pause in policy tightening. August services prices were well below the BoE’s forecast of 7.2%. As some have expected, the central bank decided to leave rates unchanged at 5.25%, this would later lead desks to pencil a peak in the Bank Rate. More recently, a survey compiled by the central bank showed CFO’s inflation expectations easing, three-year inflation expectations fell to 3.2%, and 12-month expectations slowed 0.2pp to 4.8%. Some analysts have turned their attention to recent softness in the growth front, the desk at UBS and MUFG said that weak U.K. GDP is likely to keep the BoE on hold. MUFG noted that a slowdown in prices and disappointing growth support their view of a peak Bank Rate of 5.25%, they also mentioned that the scaleback in further tightening pricing caused sterling to underperform from August to September. If the September CPI report shows a continuation of the deflationary trend, this would concrete expectations that the BoE is done, our Macro Walk report shows OIS currently pricing 12bps of additional tightening from the BoE, this compares to 50bps back in August.
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