GBP/USD, EUR/GBP diverge as UK consumer inflation dives

UK consumer and producer inflation dropped in June as prices of most items retreated. The headline consumer price index (CPI) dropped from 0.7% in May to 0.1% in June. This decline was steeper than the estimated 0.4%.

UK inflation slips

The decline translated to an annual increase of 7.9%, the lowest level since 2021. It was lower than the median estimate of 8.2% and the previous 8.7%. 

Core consumer inflation, which excludes the volatile food and energy products, dropped to 0.2% (MoM) and 6.9% (YoY). The decline was worse than the expected 0.4% and 7.1%. 

These numbers will provide some relief to the Bank of England (BoE), which has been in a fight against inflation for a while. It has hiked interest rates from zero during the pandemic to the current 5.0%.

Still, the country’s inflation remains above that of most countries. For example, the headline inflation in the United States dropped to 3.0% in June. The euro area inflation has dropped to 5.0%. The country’s inflation is also significantly higher than the Bank of England target of 2.0%.

Producer inflation has also declined. According to the ONS, the producer price index input (PPI) dropped by 2.7% while the PPI output fell to 0.1%. 

Strong GBP/USD growth

EUR/GBP, GBP/USD charts

Official UK inflation figures came a day after Kantar published its grocery prices figure. According to the company, grocery prices fell for the fourth straight month in July. These prices dropped to 14.9% in June from the previous 16.5%. This was the biggest decline since March.

UK’s inflation trends have coincided with the strong British pound. The GBP/USD pair has surged by more than 25% from its lowest level in 2022. Similarly, the EUR/GBP exchange rate has tumbled by over 6% from last year’s high.

A stronger pound has a positive impact on inflation since the UK imports most of its items like crude oil and natural gas.

The UK inflation numbers came about two weeks before the Bank of England (BoE) meets. Most analysts expect the bank will hike interest rates by another 0.25% to 5.25%. The GBP/USD price plunged by over 70 basis points to 1.2945 after the UK inflation numbers.