UK CPI inflation for May came in hotter than expected at 8.7%, topping estimates of 8.4%.
“UK CPI rose 8.7% in May, the same level we saw in April but ahead of forecasts that were looking for 8.4%. Everyone’s new favourite metric, core inflation, which strips out things like energy and food was also disappointing rising 7.1% on expectations of 6.8%,” said Matt Britzman, equity analyst at Hargreaves Lansdown.
“This read won’t do policymakers any favours who are under increasing pressure to keep inflation coming down in the UK, but it’s looking stickier as the months roll by.”
Markets are now pricing 0.75% in UK interest rate increases over the next two Bank of England rate decisions. Some traders are now pricing a terminal rate – the highest point rates will rise to – of 6.2% by December.
The upside surprise in inflation sent waves through markets, with the UK 2-year gilt yields jumping back above 5% and FTSE 350 housebuilders sinking on the prospect of higher mortgage rates. GBP/USD spiked higher before traders faded the rally.
The Bank of England will issue their interest rate decision tomorrow, and the subsequent press conference and accompanying commentary will be closely scrutinised for hints of the future rate trajectory.