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U.K Inflation Cools Down in September

Posted: Friday, October 22nd, 2021

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U.K. inflation data for September showed that the rise in prices of goods and services eased. The annual Consumer Price Index (CPI) dropped to 3.1% from 3.2% previously.

Inflation in the United Kingdom declined in September, falling to 3.1% from the previous 3.2%. Nevertheless, it remains well above the Bank of England’s 2% target, and so the pressure to tighten the monetary policy continues.

The Bank of England’s governor took markets by surprise last Sunday when he stated that the central bank is preparing to react to the rise in the prices of goods and services. Short term rates quickly reacted, and the British pound gained in the first days of the trading week.

Therefore, today’s inflation data was important for British pound traders in relation to what the governor said. Higher than expected inflation would have meant that a rate hike is a done deal. However, inflation cooled down, so the uncertainty would persist until the next Bank of England meeting.

UK Inflation Data

Transportation Contributed the Most to September’s Inflation

The largest single upward contribution came from transportation – up +0.91% on the month, while restaurants and hotels made the largest downward contribution.

Changes in the price of motor fuels are responsible for the uptick in transportation prices, once again proving that the rising energy prices in the markets do trigger higher inflation. Just to exemplify, the average petrol prices in September were 134.9 pence per litre, and one year earlier, they were 113.3 pence per litre.

The slowdown in inflation led to a decline in the British pound across all FX pairs. Most notably, the GBP/USD dropped into the mid 1.37 area, after yesterday it was trading well above 1.38. Therefore, investors adjust their expectations regarding what the Bank of England will do next.

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