As expected, consumer prices in the U.K. rose by 2.0% from a year ago in May, slowing down from April’s 2.3% annual increase and marking its lowest readings since July 2021.
Core CPI, which excludes volatile items like food and energy, gained by 3.5% y/y after a 3.9% y/y uptick in April
On a monthly basis, headline CPI increased by another 0.3% as the markets had expected while core CPI decelerated from 0.9% to 0.5%:
- Headline CPI for May (y/y): 2.0% (2.0% expected, 2.3% previous)
- Core CPI for May (y/y): 3.5% (3.4% expected, 3.9% previous)
- Headline CPI for May (m/m): 0.3% (0.3% expected and previous)
- Core CPI for May (m/m): 0.5% (0.2% expected, 0.9% previous)
The report detailed that the price slowdowns came from eight out of ten divisions, with “food and non-alcoholic beverages, recreation and culture, and furniture and household goods” providing the biggest downward pressure while “transport” prices partially offset the price decreases.
Link to U.K. Consumer Price Index for May 2024
In a separate (but simultaneous) release, the ONS published May’s factory gate prices showing lower producer prices compared to a year ago. Monthly PPI readings also missed market estimates after showing slight increases in April.
Link to U.K. Producer Price Index for May 2024
- PPI input (y/y) for May: -0.1% (-1.0% expected, -1.4% previous)
- PPI input (m/m) for May: 0.0% (-0.1% expected, 0.8% previous)
- PPI output (y/y) for May: -1.7% (1.9% expected, 1.1% previous)
- PPI output (m/m) for May: -0.1% (0.2% expected, 0.3% previous)
Market Reactions
British pound vs. Major Currencies: 5-min
Overlay of GBP vs. Major Currencies Chart by TradingView
Before the CPI and PPI reports were released, the British pound was trading within tight ranges, with the exception of its pairing with the Australian dollar, which was bolstered by positive market sentiment.
Initially, the easing of inflationary pressures sparked discussions about the possibility of the Bank of England (BOE) cutting interest rates sooner rather than later.
However, traders quickly shifted their focus to the core inflation rate, which exceeded the BOE’s forecasts, and to services inflation — a key concern for the central bank — which remained stubbornly high for the month. Some analysts also suggest that inflation could rise again as the effects of decreasing energy prices diminish in the coming months.
Following the release of the reports, the GBP initially dropped but then surged to new intraday highs against its counterparts due to diminished expectations of a BOE rate cut. Sterling held onto its gains, although it experienced some profit-taking during the U.S. session, coinciding with a U.S. bank holiday.