Pound rises from Inflation boost

August 25, 2016

After being under pressure the pound rebounded after inflation (CPI) came in marginally higher than expected for the year to July at 0.6%, against 0.5% anticipated. This increase in the rate of inflation was predominately driven by an increase in fuel prices as recovering oil prices and a weaker currency began to take effect. CPI was also supported by a slower fall in food prices and more expensive alcoholic drinks and hotel rooms. While the headline rate was the most broadcast, separate figures from the ONS indicated that the weaker currency has already begun to push up import prices for UK manufacturers which will feed through to higher consumer prices in the medium term. It is therefore expected that the rate of inflation will increase over the coming months as this and other commodity influenced prices have an impact.


UK retail sales grew by 5.9% compared with a year earlier as warmer weather and overseas visitors boosted spending. It has encouraged investors that the UK consumer has not been too unsettled by the Brexit vote and is still willing to spend. Furthermore, there is evidence to suggest that overseas visitors are taking advantage of a weaker pound to buy big ticket items such as watches and jewellery, with sales of these items up over 16.6% on the same month last year. While this is a welcome boost, the effect may be short lived as import prices increase and the currency benefit fades.


While emerging markets have enjoyed a strong rally after being out of favour for five years, data from China suggests that the world’s second largest economy may struggle to meet their 6.5% growth target. Industrial production and fixed asset investment fell short of expectations along with retail sales disappointing. However, China is continuing its transition from an investment and export led economy to one driven by domestic consumption. With retail sales growing at a rate of over 10% (faster that the rate of the overall economy), the transition is making progress, although it will take time.


Index Open Close Change % Change
FTSE 100 6916 6858 -58 -0.84%
S&P 500 2184 2183 -1 -0.05%
Dax 10742 10589 -153 -1.42%
Cac 40 4507 4400 -107 -2.37%
Nikkei 225 16919 16545 -374 -2.21%
UK 10 Year Gilt Yield 0.511 0.584 0.073 14.29%


Japanese CPI out on Friday.