UK Inflation Surprises to Upside at 4.1%, Pound Rallies
British consumer prices accelerated more than expected in January, driven by energy costs and services inflation, pushing back expectations for Bank of England rate cuts.
Tobias Richter
European Markets Editor
UK consumer price inflation rose to 4.1% year-over-year in January, above the 3.8% consensus forecast and up from 3.6% in December, according to data from the Office for National Statistics.
The surprise increase was driven primarily by rising energy costs following the Ofgem price cap increase in January, as well as persistent services sector inflation which remained elevated at 5.8%. Core CPI — which excludes food and energy — came in at 3.9%, above the 3.6% expectation.
Sterling surged 0.8% against the dollar to $1.2640 and gained 0.5% against the euro as markets repriced Bank of England rate cut expectations. Traders now see 60% odds of a hold at the March meeting, up from 35% before the data.
UK gilt yields rose across the curve, with the 2-year yield jumping 10bps to 4.52% and the 10-year gaining 7bps to 4.38%. The FTSE 100, heavily weighted toward internationally-earning companies, was broadly flat.
Bank of England Governor Andrew Bailey has previously warned that "we should not assume the path to 2% will be smooth." Today's data validates that caution. The next MPC decision is on March 20.