Inflation Slip Prompts Big Drop in Pound Sterling Against Euro, Dollar + Other G10s

• Quotes:
• Pound to Dollar exchange rate: 1.3030, down 0.24%
• Pound to Euro exchange rate: 1.1265, down 0.93%

The UK might just have witnessed peak-inflation, and Pound Sterling doesn't like this development.

Data released by the ONS on Tuesday, July 18 shows the headline CPI measure of inflation grew by 2.6% in June, well below the 2.9% figure forecast by economists.

It is also well below the previous month’s reading which showed inflation for May stood at 2.9% suggesting a peak might have been hit.

This will be welcomed by consumers but Sterling fell in response as traders bet the Bank of England is unlikely to pursue an interest rate rise in 2017 on the back of the data.

The Bank had been hinting at potentially raising rates in light of the rise in inflation witnessed over the past year, and the promise of higher rates was seen supporting the Pound.

"We think the impact of GBP depreciation following the EU referendum has now fully passed through to prices and in the context of low rates of wage growth, headline inflation has peaked," says Hamish Pepper at Barclays.

Meanwhile, core CPI rose by 2.4%, below analysts forecasts for a rise of 2.6% suggesting wage growth in the economy is not placing undue strength on prices.

The data will be key in influencing the ongoing debate surrounding the Bank of England and whether or not now is the time to raise interest rate.

Today's data is actually in line with the Bank of England’s latest forecasts.

The Bank has become increasingly tetchy with regards to the country’s elevated inflation rate and by raising interest rates they would be helping to stem further advances; the theory goes that higher rates make for a stronger British Pound, even though some argue such a move would have the opposite effect.

Today's data does however seem to suggest inflation is falling and therefore an interest rate rise might not be warranted after all.

However, economist Ruth Gregory at Capital Economics warns that this drop in the inflation rate might be temporary.

"Despite UK CPI inflation recording its largest monthly drop in June since February 2015, this is unlikely to mark a turning point, with further increases at the end of 2017 still likely," says the analyst following the ONS release.

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Although annual food inflation has risen to its highest since November 2013 in response to Sterling’s fall, this was more than offset by falls in a number of other categories, notably fuel prices and toys and games.

While further rises are probably in prospect, CPI inflation should now not be too far away from its peak.

Note that producer input price inflation fell further, from 11.6% in May to 8.8% in June, while output price inflation dropped from 3.6% to 3.3%.

This suggests there are still more rises ahead.

"So while we still think that CPI inflation will reach a peak of about 3% towards the end of 2017, it seems likely to drop back pretty quickly in 2018," says Gregory.

"All in all, then, this provides further evidence that the squeeze on consumers’ real incomes will probably be nowhere near as large, or as long-lasting as it was after sterling’s last major depreciation in 2008," adds the analyst.