Originally published at: This week in charts: UK inflation’s ripple effect – InvestEngine Insights
UK inflation higher than expected…
The main market news this week was the release of UK inflation data. Headline inflation climbed to 3% in January (up from 2.5% in December), surpassing consensus forecasts of 2.8% and marking a 10-month high. While some of the upward inflationary pressures were well-anticipated, such as the 13% spike in private school fees as a result of VAT being imposed on them, rises in food prices and smaller-than-usual drops in airfares came as a surprise.
Services inflation, closely watched by the Bank of England, increased from 4.4% to 5%, while core inflation also rose from 3.2% to 3.7%.
…causing a selloff in the FTSE…
The higher than expected inflation caused the FTSE to fall over 1% over the following two days, based on worries over “higher for longer” interest rates. Despite this drop, the UK market is performing well relative to other international markets.
While Europe is still leading the way with gains over 9% so far this year, the UK remains up over 6%, with Emerging Markets gaining over 4%, and the US unusually lagging its regional peers, returning only 3% so far this year in sterling terms.
…as well as a moderating of rate cut expectations…
Thanks to the inflation figure, markets have reduced expectations for policy easing, now pricing in a total of 0.56% in cuts by the end of 2025. This equates to just over two 25bp rate cuts, which is down from earlier, more aggressive projections of almost 3 cuts, earlier in the year.
…bringing the 2025 year-end implied rate to just over 4%
Despite persistent inflationary pressure, markets are still predicting rates to edge down towards 4% by year-end, reflecting the market’s belief that the Bank of England will gradually continue on its path of rate cuts.
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