A hotter-than-expected inflation reading in the United Kingdom has thrown a cold shower on hopes that the fight against inflation is nearing an end.
In May 2023, consumer price inflation in the United Kingdom was 8.7% year-on-year, unchanged from the previous month but higher than market estimates of 8.4%. Monthly inflation increased by 0.7%, exceeding market expectations of 0.5%.
The underlying measure of inflation, which excludes energy, food, alcohol and tobacco, also surprised to the upside, accelerating from 6.8% in April to 7.1% in May and reaching the highest level since 1992.
Inflation in the United Kingdom peaked in October 2022 at 11.1%, but has subsequently fallen at a significantly slower pace than in the United States. After hiking rates by 25 basis points to 4.5% in May 2023, the Bank of England forecasted inflation lowering to 5.1% in Q4 2023, and meeting the 2% target by late 2024. Following the latest CPI data, the risk is that the path back to the 2% target will be further prolonged.
Chart: Rising UK Core Inflation Tells That Price Pressures Extend Beyond Energy and Food
![](https://s3.amazonaws.com/editorial.benzinga.com/wp-content/uploads/2023/06/21082253/GBCIR_2023-06-21_14-20-56_bd1b0-1024x683.png)
Traders Expect Stronger BoE Hikes, 2-Year Gilt Yields Jump To July 2008 Highs
In response to the unexpectedly high inflation reading, traders upped their expectations for additional interest-rate hikes by the Bank of England, and now anticipate a 50% likelihood of a half-point hike at the upcoming meeting on Thursday. The market is fully pricing in UK interest rates to rise to 6% by December 2023.
The yield on 2-year gilts, which is seen as a barometer of market-rate expectations, has skyrocketed above the 5% mark, jumping to the highest level since July 2008.
Chart: UK 2-Year Yields
![](https://s3.amazonaws.com/editorial.benzinga.com/wp-content/uploads/2023/06/21081939/GB02Y_2023-06-21_14-19-15_459e1-1024x683.png)
Fed Is Now On Alert: Powell Testifies Before The Congress
The Fed may take note of the recent reacceleration of inflation in the United Kingdom as a reminder that the war against inflation is not over yet.
Bond speculators also upped their expectations on a fresh rate hike by the Fed in July, now assigning 79% chance to this outcome, up from 62% a week ago.
Treasury 2-year yields ticked 4 basis points higher to 4.73%, recovering more than half of the drop posted on Tuesday. The rise in short-term yields is likely to result in a negative session for the Ishares 1-3 Year Treasury Bond ETF SHY.
Fed Chair Jerome Powell will testify before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday.
Read now: Powell To Testify Before Congress After Fed Pause: What The Market Is Watching For
Photo: Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.