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US vs UK Inflation: Looking for Support for Cable

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Coming up we have some data that could underscore how different the post-covid recovery has been across the world. There is a gap in the economic situation among various countries, which is an excellent opportunity to look for potential trades.

Later today the US reports the June inflation data, and tomorrow the UK will do the same.

Even though we can expect a higher inflation rate in the US, the general consensus is that the Fed will not act urgently. However, in the UK, the BOE might bring forward consideration rates if there is a significantly lower inflation rate.

This highlights the divergence in policy between these two major central banks.

What’s going on

Analysts anticipate that the US will report a June inflation rate of 0.5%. This is a slight slowing of the pace from the prior 0.6%.

Compared to a year earlier, that would be 4.9% inflation. This is also slightly less than the 5.0% in May, which is what will most likely get the most media attention.

But, when stripping the more volatile food and energy (which is what regulators focus on), analysts still expect monthly inflation to be at 0.5%, still lower than May’s 0.7%. That means over the last twelve months, the expectation is for 4.0% inflation compared to 3.8% reported last time.

This is double the Fed’s pre-pandemic target, and even higher than the level that many members have said that they would tolerate.

Why the little reaction

Despite higher inflation, which has pushed real wage growth into negative territory, Fed officials insist that it will be transitory.

In fact, the slowing of the pace of increase could be seen as a sign that this scenario will play out. The Fed has intimated that inflation will get back “under control” by the end of the year.

There is some dissent, most notably and recently by Dallas Chair Kaplan. Kaplan worries about potential inflation, but he’s not an MPC voter. In fact, he won’t be until 2023, when rates are already expected to be higher.

Things are different across the pond

Tomorrow we will get the release of inflation data from the UK, just before markets open. Economists expect the Headline annual CPI to come in at 2.2%, a slight increase in the pace from 2.1% prior. However, it’s the core rate that the regulators follow, and we can expect that to stay at 2.0%, bang in line with the BOE’s target.

To further support the notion that inflation isn’t getting out of hand, expectations are for monthly CPI to drastically slow down to 0.2% from 0.6% in the prior month.

Moving the market

Of course, the UK is in a somewhat different situation, as covid restrictions still remain in place until the end of the week.

The Delta variant remains much more of a concern, which is weighing on the rebound.

The major difference is that the BOE hasn’t committed to allowing inflation to rise above target, unlike the Fed. So, while inflation remains where it is, the BOE could keep policy steady.

However, an increase above expectations could restart rumors of BOE tightening and push Cable higher.

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