Loads of economic data are out this week – which could spur additional volatility for GBP currency pairs as well as the FTSE UK index.

What is CPI data?

CPI stands for Consumer Price Index – which is an index that measures the change in price of a basket of goods and services such as food, energy, housing, clothing, transportation, medical care, entertainment and education. The goal is to measure a standardised cost of living

Why is it important?

The CPI measures inflation (a sustained rise in prices in an economy) as experienced by consumers in their day-to-day living expenses. Signs of inflation indicate that the central bank may need to intervene as per inflation targeting mandates. 

Changes to interest rates are a key driving force behind currency movements.  With higher interest rates being bullish and lower interest rates, bearish.

When inflation rises – purchasing power falls.

CPI can be greatly influenced in any given month by a movement in volatile food and energy prices. Therefore, it is important to look at CPI excluding food and energy, commonly called the “core rate” of inflation.

What to do?

Market analysts are expecting to see a dull 0.2% uptick in the May CPI reading, which should be enough to keep the annual figure unchanged at 2.7%.

The producer price index (PPI) is also expected at the same time and input prices are expected to decline 0.3%.  This could result in downward pressure on overall inflation as changes in costs for manufacturers are usually passed on to consumers (eventually) – this is a lagged indicator because manufacturers and retailers are slow to lower prices.

Lower inflation is not the worst case for the U.K economy as politicians have been concerned with the squeeze felt by consumers due to the higher prices of basic goods and energy. 

A higher than expected read could result in higher interest rate expectations as the Bank of England could then step in and tighten monetary supply (by raising rates) to control inflation.