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    Pound surges on Carney comments reversing declines from weak UK inflation

    Inflation in the UK showed no signs of picking up in June as annual CPI fell to 0% from 0.1% in May. The figure was within forecasts but the month-on-month rate of 0% was below estimates of 0.1%. Core CPI, which excludes food, energy, alcohol and tobacco, was also below forecasts at 0.8%, versus expectations it would stay unchanged at 0.9% in June. This was the lowest level since March 2001.

    The downward pressure came mostly from lower food prices, which fell by 2.2% over the year. Prices of clothing and footwear, furniture, transport and recreation were also lower than 12 months ago. Electricity, gas and other fuels continued to benefit from falling energy prices, with prices falling by 3.1% over the year. The biggest upward pressure came from alcohol and tobacco, and education.

    Further deflationary pressures were evident in producer prices with input prices falling by 12.6% over the 12 months to June, against forecasts of an 11.8% fall. However, output prices declined at the slowest pace this year, coming within forecasts at -1.5% in June, up from -1.6% in May.

    Tuesday’s CPI figures will not be any cause for concern to the Bank of England, which expects inflation to rise to above 1% towards the end of the year. The Bank of England’s main worry is the tightening labor marker in the UK. Average earnings data due on Wednesday is expected to show pay growth accelerating to 3.3% in May. Other fundamentals have also improved significantly in the UK putting the Bank on course to raise interest rates in the first half of 2016.

    Expectations were further fuelled today after the Bank’s governor Mark Carney said at a speech during a parliamentary hearing that “the point at which interest rates may begin to rise is moving closer”. He said that above trend growth and firming in domestic costs should offset external deflationary pressures but added that rates should rise at a “gradual pace and to a limited extent”.

    The comments sent the pound soaring by 0.9% against the dollar, which had fallen after inflation data came in mostly below forecasts. Sterling made an impressive jump from 1.5465 to 1.5602 against the dollar. Its gains against the euro were slightly more limited. The euro had advanced to 0.7137 after the weak inflation figures but soon tumbled to 0.7068 after Carney’s remarks.

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