The Producer price index has been showing factory gate prices rising at an accelerated rate for quite some time, but this hadn't really fed through to the CPI figures until the last few months, but now we are seeing the high cost of food and fuel prices start to hit the high street. The expectations for yesterday's CPI figure were for the rate to tick higher, to around 3.6%, the figure was actually far worse than that jumping up to 3.8%, with the RPI jumping up to 4.6%. As in recent months it was food and fuel which has driven price rises; food is now 9.5% more expensive than 1 year ago, while transport is 7.1% higher. The tick up in RPI will be especially worrying for the MPC as this is the benchmark regularly used in wage negotiations (perhaps today's council workers strike could be the sign of things to come.). However there is some mitigating factors in the details, with the core CPI figure, without food or fuel is still relatively low edging up to only 1.6%.

The CPI figures yet again put pressure on the MPC, although there is no need to write a letter to the Chancellor until next month. Higher inflation further pushes back any chance of rate cuts; Sterling has jumped on the back of the figures, pushing up towards 1.26 against the Euro, and up above 2.01 against the US Dollar. The rise against the Dollar wasn't just caused by UK CPI figures, the Dollar is suffering from it's own worries. The markets seems to have considered the proposed rescue of the two government backed US mortgage giants, and have decided they are unimpressed. Weak retail figures released yesterday didn't help, but the biggest factor in the Dollar's fall was Bernanke testimony to the senate committee. His testimony was much more pessimistic than previous details from the Fed, stressing the 'numerous difficulties' faced by the US economy which will grow 'appreciably below its trend rate.'.

The Dollar fell against most currencies with the Yen and the Swiss Franc benefiting most from the fallout of the Dollar's weakness. The Euro climbed to a new record high, hitting 1.6038, before the Dollar clawed back some of it's losses, possibly due to a sharp fall in the price of oil, which dropped almost $8 to below $139, the largest one day fall in 17 years; unfortunately this correction in the price isn't likely to be the start of a downward trend and is more likely a reaction to the downgrading of expectations for US growth.
We've got employment data today, which is likely to show unemployment starting to grow, although it is not going to show the recent announcements of redundancies from the construction industry. A slightly larger sector of the economy unemployed will help employer's wage negotiations, keeping inflation lower, although this is no comfort to those queuing in the job centre.

The main focus for the day will be the US; they have their own CPI figures, as well as a second day of Bernanke's testimony and the minutes from the last FOMC meeting. US CPI is expected to rise to 4.5%, which will further push ideas of rate hikes, although with the US economy in such dire straits and with the markets hostile to the Dollar, is unlikely to provide much relief.

Michael Corcoran - Treasury Solutions | nabCapital™

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