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UK inflation rises above 3% for first time since 2012

Traders can expect the Brexit news to lose prominence, at least temporarily, for the next few days as the market shifts its focus to UK wage data, which would be announced later today, and Bank of England’s policy meeting scheduled tomorrow. Notably, the US FOMC meeting ends today and market widely expects the Fed to hike the benchmark rate to a range of 1.25% to 1.50%.

Yesterday, the Office for National Statistics reported an increase in consumer prices by 3.1% m-o-m in November, up from 3% in the previous month. Analysts had expected an inflation rate of 3%. Inflation has crossed above 3% for the first time since 2012. Excluding the price of volatile goods, the core inflation rate remained steady at 2.7% and in line with analysts’ estimates.

An increase in air fares as well as recreational goods such as computer games were primarily responsible for the increase in the inflation rate.

Likewise, the Producer Price Input or the change in the price of goods and raw materials purchased by manufacturers increased 1.8% m-o-m in November, versus 1.6% anticipated by economists, and greater than 1% increase recorded in the previous month.

In November, for the first time in a decade, the Bank of England raised the interest rates to 0.5% to counter the rising inflation. As long as inflation stays above the 2% target and the economy continues to show improvement, the Bank of England will ponder raising rates. A rise in interest rates would strengthen the Pound as the currency will turn attractive to investors.

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As the inflation rate has crossed 3%, the Bank of England’s Governor has an obligation to write a public letter to the Chancellor, explaining the steps that the Monetary Policy Committee will likely take to bring the inflation back to its 2% target.

Today’s wage data will also be closely watched by the market participants as it would set the tone for the future rate hikes. Most economists anticipate the inflation to decline steadily in 2018 and earnings to rise above inflation. A real wage growth will give more confidence to the Bank of England for rising rates.

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