Please see below, an article from Evelyn Partners detailing the latest UK CPI Inflation figures and their thoughts on how this data may impact future policy decisions. Received this morning – 18/09/2024
What happened?
UK August annual headline CPI inflation came in at 2.2% (consensus: 2.2%), versus 2.2% in July. In monthly terms, CPI was 0.3% (consensus: 0.3%), compared to -0.2% in July. Core CPI inflation (ex-energy, food, alcohol and tobacco) came in at 3.6% (consensus: 3.5%) vs 3.3% in July.
What does it mean?
Although the core measure surprised on the upside in August, the broad downward trend in lower UK CPI inflation is intact. This should encourage the Bank of England (BoE) to cut interest rates over the coming quarters.
However, given that services CPI inflation remains elevated at 5.6% year-over-year and economic growth has picked-up in the first half of 2024, the BoE will probably take a cautious approach in loosening unless there is significant belt tightening coming after the budget on 30 October that dampens growth expectations.
Looking at it relatively, the futures markets point to a more rapid pace of rate cuts coming out of the US than in the UK. By June 2025, the market expects the Fed base rate to be 3.0%, compared to 3.5% for the BoE, when the current rates are 5.5% (upper bound) and 5.0%, respectively.
Higher relative rates in the UK are likely to play out through sterling appreciation against the US dollar. Other major currencies (i.e. the euro and yen) could also make gains against the US dollar as the Fed becomes dovish.
The bottom line here is that a weaker dollar indicates that there is greater supply of US dollars floating around the financial system compared to demand. On balance, this is favourable for equities, as investors seek a home to park their money.
Another beneficiary from US dollar weakness is gold bullion. As the greenback falls in value, the US dollar-denominated gold price becomes cheaper to non-dollar investors, and this creates demand.
Moreover, the gold price is supported by secular foreign central bank bullion purchases. This follows Western financial sanctions against Russia after its invasion of Ukraine: most notably the freezing of Russia’s overseas assets, including its holdings of US government debt. Such action may encourage other major holders of US treasuries, like China and Saudi Arabia, to recycle less of their trade surpluses into foreign bonds over fears that these assets could be seized in the future. Considering this risk, central banks outside Western financial systems will increasingly view gold – which can be held physically within national borders – as an alternative to government bonds, creating a new structural demand driver for bullion.
Bottom Line
The broader trend of lower UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US. Potentially, this should provide upside for the sterling exchange rate against the US dollar. Gold will continue to benefit from broad-based weakening in the greenback and secular bullion demand from central banks in emerging economies. Gold also provides some diversification qualities in portfolios to boot.
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Alex Kitteringham
18th September 2024