ForexLive preview of UK April inflation data due 19 May 2015
The UK has been walking a fine line with inflation and we've had two straight months of zero year on year CPI
We get the next load of inflation data on Tuesday and the market is expecting another flat read y/y and 0.4% m/m vs 0.2% in March. The core is expected in at 1.0% vs 1.0% prior y/y
The latest BRC retail price data for April showed a bigger than expected drop in prices of 1.9% vs -1.7% prior. That was up from -2.1% in March so heading in the right direction. Retail price inflation is expected in at 0.9% y/y, the same as last month for both the headline and the stripped out financials
In the services sector prices were cut by firms at the fastest rate since Feb 2012. Output prices fell for the first time in six months while input prices rose due to wage increases. The pressures on margins is likely to be reflected across the board and that puts some downward bias on the CPI numbers due
UK CPI and core y/y
We'll also get a closer look at the margin squeeze with the PPI data released. Input prices are expected to fall 11.5% y/y vs -13.0% in March, and output prices -1.6% vs -1.7% prior y/y. The Core output price is expected to maintain it's 0.1% gain y/y. As I mentioned above there's scope to see these prices come in lower again
A lot of the UK price picture is made up of energy prices and the bounce in oil will have an effect on the data at some point. Oil prices bottomed in Jan and have been rising since, so we're getting close to the point where we see that transmitting into CPI. Given our exposure to energy costs it means the move in inflation will probably be seen quicker here than in other countries. Tuesday's data may be too early to see that happening but it's something to be prepared for.
With wages heading in the right direction it's another upward pressure for inflation. There's still some way to go to see a trend of real wage growth but the readings from the last labour market report suggest that we haven't seen the end of payrises
UK average earnings
On balance I'm wary about the services price cuts from firms, as well as retail sector prices continuing to fall by large amounts. That suggests that we could well see the core CPI drop again tomorrow. For headline inflation, it's probably too soon to see the higher oil prices feeding in. If I had stick my neck out, I'd say that we see the core drop and headline remain unchanged or suffer a small drop.
Trading wise, a drop of 2 points or more in the core will do the pound some damage, even if the headline holds up. If that drops by 2 or more also then we could see the quid take a decent dive. If inflation does pick up then that might catch the market off guard and we'll get a sizeable upside reaction. Again, use the 2 point variation rule as your guide. Anything within those the 2 point variation is probably not worth trading and any moves will probably fade back to whatever trend is in place at the time
As usual we'll have all the numbers and analysis as they happen
