The first of two UK inflation reports, before the June Bank of England rate decision, will arrive on Wednesday at 07.00 BST.

What does this mean for traders?

 The headline will get very close to the bank’s 2% target. Monitoring services inflation will serve as the key gauge for policymakers and influence the movement of the GBP.

· Headline inflation is expected to fall sharply to 2.1% from 3.2% in April.

· The core reading is forecast to drop to 3.6% from 4.2%.

· Focus will be on the services print, expected at 5.4%, as this is more sensitive to labour costs and is taking longer to cool.

· GBP could be quite volatile as markets are pricing in around a 56% chance of a June 25bps rate cut. But another CPI report is scheduled for release the day before the June BoE meeting.

UK CPI is a pivotal risk event for GBP and holds the keys to a potential rate cut by the Bank of England next month. In fact, it could be a tale of two inflation readings as the headline figure is set to ease quite dramatically and potentially hit the Bank of England’s 2% target. This will undoubtedly grab a lot of the headlines as only eighteen months ago, this hit a 42-year high at 11.1% when hot inflation gripped markets and the wider population.

Easing supply chains and falling energy prices have brought CPI down since October 2022. The latest report will see the April headline rate slide further due to a 12% fall in the household energy bills cap set by the energy regulator Ofgem, following a decline in wholesale gas prices.  

Services Inflation is key metric

The MPC at the Bank of England is most focused on services inflation which is the crucial gauge as to whether rate setters will pull the trigger next month. This figure is connected with wage growth which has been sticky and elevated. Services price growth is predicted to come in around 5.5%, which is the number forecast by the BoE.

Going forward, the services print should decline further as wages gradually slow. Regarding headline inflation in general, it is predicted to remain around 2% over the next few months before rising modestly due to the unwinding of those energy-related increases observed over a year ago. Indeed, Governor Bailey backed this up when he recently warned that price pressures could rise into the summer, with the headline remaining above the bank’s 2% target.

Market reaction

An upside surprise in the data could boost cable, which has enjoyed a stellar three weeks versus the dollar. Modestly softer than expected US inflation recently fuelled hopes of rate cuts across the pond, hurting the greenback.

That said, the market reaction could be relatively muted after an initial reaction, with another CPI report and two wage data reports released before the Old Lady meets in June.

The information has been prepared by Vantage UK as at 21st May 2024 and is subject to change thereafter. The information is provided for educational purposes only and doesn’t take into account your personal objectives, financial circumstances, or needs. It does not constitute investment advice. We encourage you to seek independent advice if necessary. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty is given as to the accuracy or completeness of any information contained within. This material may contain historical or past performance figures and should not be relied on. Furthermore estimates, forward-looking statements, and forecasts cannot be guaranteed.

Source: Reuters estimates