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The process of disinflation is intact and not completeWe need to maintain monetary policy restrictivenessCore inflation is falling again after having stalledI hope inflation expectations will fall with slowing inflationUnderlying inflation should be the focus of policyDisinflation is not as rapid or convincing as hopedUnderlying inflation looks more like 2.5%, not 2%Monetary policy stance is still restrictiveWe are not seeing a collapse in activity, forward looking indicators do not suggest this is likelyProductivity improvements are cyclical and mechanicalTrend productivity not going back to where it wasDisinflation in underlying services is flatteningWe should be cautious on the last mileRates are currently a bit too lowHolding rates at this level should be enough to control inflationBank of England Chief Economist Huw Pill has signalled that while the battle against rising prices is moving in the right direction, there’s still more to do to get back to the 2% target. He is cautiously optimistic but wary of declaring an early victory.Pill notes that the process of disinflation remains intact, though he admits it has been neither as rapid nor as convincing as policymakers had initially hoped. While the headline figures may fluctuate, the “underlying” figures is what the Bank is focused on. Pill suggests that underlying inflation is currently tracking closer to 2.5% rather than the BoE’s 2% target. A particular point of concern is the “flattening” of disinflation within the services sector, which remains stubborn despite broader price cools. On a positive note, core inflation has begun to fall again after a period of stagnation, providing some evidence that the current policy is working.Despite some calls for aggressive rate cuts, Pill’s stance remains firmly rooted in restrictiveness. He argues that the current monetary policy stance must remain tight to ensure expectations continue to trend downward alongside slowing inflation.Addressing the broader health of the UK economy, Pill dismissed fears of an imminent “collapse in activity.” Forward-looking indicators suggest stability rather than a sharp downturn.
This article was written by Giuseppe Dellamotta at investinglive.com.
💡 DMK Insight
Core inflation’s recent stall signals potential volatility ahead for traders. The ongoing disinflation process is crucial, but the fact that underlying inflation is hovering around 2.5% suggests that the Federal Reserve may need to maintain its restrictive monetary policy longer than anticipated. This could impact interest rates and, consequently, forex pairs sensitive to U.S. monetary policy. If inflation expectations don’t fall as hoped, we could see increased market volatility, particularly in assets like the USD or commodities that react to inflation data. Traders should keep an eye on upcoming inflation reports and Fed communications for clues on future policy adjustments. Here’s the flip side: if inflation expectations do start to decline, we might see a rally in risk assets as the market prices in a potential pivot from the Fed. Watch for key technical levels in the USD index and related forex pairs, as a break below support could signal a shift in sentiment. Immediate focus should be on the next inflation report and any Fed commentary, as these will be pivotal in shaping market direction.
📮 Takeaway
Monitor the upcoming inflation report closely; a shift below 2.5% could trigger significant market moves, especially in USD pairs.
