UK Inflation Slows, Triggering FTSE Rise and Sterling Fall By


The rose and the pound fell on Wednesday, following the release of data indicating that UK inflation slowed to 6.7% in the year to August. The unexpected easing of inflation sparked a rally in London’s leading index, casting doubt over whether UK rates would indeed rise to 5.5% as previously anticipated.

On Wednesday, European stock markets started on a positive note with the FTSE 100 ( ^FTSE ) rising by 0.6% after opening, driven by a weaker pound. Meanwhile, the ( ^FCHI ) was treading water in Paris and the Frankfurt ( ^GDAXI ) was up by 0.3%.

The Office for National Statistics (ONS) reported that UK inflation slowed to 6.7% in the year to August, down from July’s 6.8%, despite a rise in fuel prices. Core inflation, which excludes energy, food, alcohol, and tobacco prices, dropped sharply to 6.2% from July’s figure of 6.9%.

Grant Fitzner, the chief economist at the ONS, attributed the slight easing in inflation to falls in the cost of overnight accommodation and airfares, as well as food prices rising by less than the same time last year. However, this was partially offset by an increase in petrol and diesel prices compared with a steep decline at this time last year.

In response to the news, the pound ( GBPUSD=X ) fell to its lowest level in almost four months, down 0.4% against the dollar to $1.2345 — its weakest since late May. Sterling also reached its lowest level against the euro ( GBPEUR=X ) since early August.

UK housebuilders rallied during the morning, leading sectoral gains as investors anticipated that mortgage rates may drop sooner than previously expected. Companies such as Taylor Wimpey (LON:) and Barratt Developments (LON:) gained 5.4% and 4% respectively.

Investment director at AJ Bell, Russ Mould, noted that weaker inflation supports the argument that interest rates may not need to increase significantly, which would benefit property-related companies and retailers. This is because consumers would theoretically not face additional financial pressures.

Mould further commented that while another rate rise from the Bank of England could still occur tomorrow, the latest inflation data increases the chance that a further rate hike could be the last in the current cycle.

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