The above graph shows that services inflation is the main culprit keeping core CPIH in an uptrend. Core CPIH dropped from 6.5% in May to 6.4% in June. Since May was a 30-year high, I am particularly unimpressed by the “pullback” in the core inflation rate. The Core CPI (Consumer Prices Index) dropped from 7.1% in May, a 31-year high, to 6.9% in June.

Food and energy inflation is coming off extreme levels. Food inflation is coming off a peak 19.2% in March, 2023. Fuel prices are outright plummeting, falling 13.1% in May and 22.7% in June.

The British Pound Cools with Inflation

The cooling overall inflation numbers cooled the heels of the British pound which has been on quite a streak since the bond and currency crisis 10 months ago. GBP/USD, also Invesco CurrencyShares British Pound Sterling Trust (FXB), was falling off a near 16-month high coming into the inflation print. The inflation report greased the skids on the way to an important test of the uptrending 20-day moving average (DMA). That line has held as support since the beginning of June and has been important support since early March.

Source: TradingView.com

For now, I am trading for a bounce from the 20DMA and prepared to to accumulate a larger position for a test of 50DMA support. The overall drivers of sterling strength seem intact as long as core inflation is uptrending or even just sticky. The Bank of England will have to remain as hawkish as ever.

Of course, the upcoming meeting of the U.S. Federal Reserve is a major wildcard. If the Fed manages to get hawkish enough to scare some fresh strength into the U.S. dollar, then I will have to drop my current trading strategy.

Regardless, the uptrend in the pound should at some point end in the coming months. This recent weakness in the currency could be the beginning of the end.

Be careful out there!

Full disclosure: long GBP/USD

The post Is the British Pound Topping Despite Lingering Strength in UK Core Inflation? appeared first on Inflation Watch.

“Inflation has remained stubbornly above the 2% target. Despite subdued pay growth, weak productivity has meant no corresponding fall in domestic cost pressures. And increases in university tuition fees and domestic energy bills, largely resulting from administrative decisions rather than market forces, have added to inflation more recently. CPI inflation is likely to rise further in the near term and may remain above the 2% target for the next two years, in part reflecting a persistent inflationary impact both from administered and regulated prices and the recent decline in sterling. But inflation is expected to fall back to around the target thereafter, as a gradual revival in productivity growth dampens increases in domestic costs and external price pressures fade.”

I took particular interest in the claim that external price pressures will fade. To do so, the global economy would have to remain weak. If so, then it is unlikely that growth in the UK will fare much better, even at the projected “slow but sustained” pace. The other possibility is that the British pound or sterling – CurrencyShares British Pound Sterling Trust (FXB) – appreciates enough that external prices go back down. If so, then Mervyn King’s hopes of rebalancing the economy with a reduction in demand for imports and an increase in exports surely will not be realized.

Adding to this conundrum for the UK economy is the stubborn persistence of weak economic growth (mainly flat) along with strong employment growth. The UK economy is getting less and less productive and thus less and less capable of offsetting inflationary pressures. This is a dynamic that I will be watching ever more closely given the BoE projects a two-year horizon over which the economy will continue to suffer high inflation and weak economic growth (aka stagflation). The implication for the currency is mixed, and I continue to expect “more of the same” for the pound.

The post The UK’s CPI inflation to remain stubbornly high for the next two years appeared first on Inflation Watch.