Home » Currency Note » Currency Note » Inflation drops in the UK and US

Yesterday was inflation day for the UK and US and both readings showed a significant drop in January. First up was the UK’s inflation rate which was expected to drop to 1.9% last month from 2.1% the previous month. However, it actually came in lower than that at 1.8%, which is the lowest level for two years. The drop was largely down to a fall in the price of electricity, gas and other fuel between December 2018 and January 2019. The news will be welcomed by British households that have been feeling the pinch these past few months.

Then came the US inflation reading which showed a drop to 1.6% from 1.9% in December. It is the third straight month that inflation has fallen in America and is the lowest rate since June 2017. Like the UK, the fall was largely brought about through a sharp fall in energy prices, particularly petrol. The news will ease the pressure on the Federal Reserve which is wondering whether or not to keep hiking interest rates, although it is worth mentioning that core inflation (which disregards food and energy costs), increased by 0.2% in January and 2.2% year-on-year.

In the early hours of Wednesday morning, Donald Trump gave a hint that he could extend the deadline to reach a trade deal with China. The President said that the existing plan – which says a trade deal must be in place by 1 March – could be changed, particularly if the two sides are making progress in negotiations. In a cabinet meeting, Trump said, “If we’re close to a deal where we think we can make a real deal and it’s going to get done, I could see myself letting that slide for a little while.” He did, however, add that he was not inclined to do that.

There was more bad news from the eurozone, as industrial production figures came in worse than expected in December, slumping by 4.2% from the same month the previous year. It is the steepest decline in industrial production since November 2009 and these are truly worrying times for the eurozone economy. Today could heap salt into the wounds, with the German and euro area GDP growth rates for the fourth quarter of 2018 on the schedule.

It appears that a no-deal Brexit is still on the table, at least according to Downing Street. Theresa May seems intent on letting the decision on whether to support her plan go to the wire, thereby forcing MPs to choose between a no-deal Brexit or her proposals. That her proposals have already suffered the biggest Parliamentary defeat of modern times has done nothing to dissuade the Prime Minister. The European Research Group – which wants a hard Brexit – has said it will not support the government motion on Brexit tonight because it rules out a no-deal Brexit. Quite why they want to exit the European Union without a deal is unclear.

One thing is certain: if the UK does withdraw from the EU without a deal in place, we can expect some significant sterling weakness. There has been speculation that the pound could lose between 10% and 20% of its value if that happens, so we encourage you to get in touch with your Personal Trader on 020 7898 0541 today to find out how to protect your budget. A forward contract, for instance, locks in a fixed exchange rate for up to twelve months.

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