Is the BoE prepared to step up its inflation fight in light of another devastating inflation report?

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Policymakers at the Bank of England will be scratching their heads this morning wondering what they have to do to get inflation down, with the latest CPI report another setback in the central bank’s ambition of delivering price stability and a soft landing.

While there are many reasons to be confident that inflation should fall sharply over the coming months including lower energy and food price contributions, it’s hard to be too optimistic when the data keeps consistently coming in well above forecasts.

There is clearly immense stubbornness in the UK inflation numbers and the fact that the core also unexpectedly rose yet again by another 0.3% will be a huge concern to the BoE. Services inflation was always going to take longer to regain control of and today’s data once again suggests momentum is strong here.

Market interest rate expectations are continuing to fluctuate after the release but there’s clearly now a much stronger case for a 50 basis point hike tomorrow, which would take Bank Rate to 5%. What’s more, markets now see it reaching 6% early next year which could be very damaging and increases the risk of the economy buckling under the pressure.

The pound initially spiked after the release, hitting 1.28 against the dollar before giving around half of that back. Higher interest rates for longer against the backdrop of a more resilient economy may remain supportive for the pound for now but as soon as the economy starts to buckle, traders may be forced to rethink.

A very choppy start to the week for Oil prices

Oil prices have been very choppy at the start of the week as traders digest weaker economic prospects against higher Iranian output and a slightly more modest rate cut in China. There are so many moving parts at this stage but at this point in time, there’s more negative than positive as far as the crude price is concerned.

Additional supply from Iran is undermining Saudi Arabia’s efforts to desperately manipulate prices higher with production cuts. China’s recovery is also not taking off as many thought earlier in the year and stimulus efforts have thus far not been as powerful as they could have been. I expect both of these will change in the second half of the year but for now, it’s not helping oil prices.

What’s more, countries are struggling to rein in inflation – the UK this morning a prime example of that – and that’s going to dampen growth and threaten recessions across the globe. This summer was crucial in determining the scale of the job still to do and so far, investors arguably have more cause for pessimism than optimism.

Gold threatening to break lower as UK inflation spikes again

Gold prices came under some pressure on Tuesday, taking the prices back to the lower end of its recent range and even threatening to break below in what could have been a bearish development for the yellow metal.

Gold has broadly traded between $1,940-$1,980 over the last month, very briefly moving outside of this range on a few occasions and the lower boundary is being tested once again this morning. It actually fell below $1,930 yesterday and nearly did the same again this morning so traders will be on high alert for a more substantial breakout to the downside.

Higher yields could be the catalyst for that depending on how traders more broadly respond to this morning’s disappointing UK inflation data. Is it a sign of a deeper problem in the global fight against inflation or just UK-specific? The dip after the release suggests the concerns around the former.