• UK CPI softens to 10.5% YoY in December vs. 10.6% expected.
• Monthly UK CPI arrives at 0.4% in December vs. 0.4% expected.
• GBP/USD holds gains above 1.2300 on mixed UK CPIs.

The UK annualized Consumer Prices Index (CPI) came in at 10.5% in December against the 10.7% booked in November while missing estimates of a 10.6% print, the UK Office for National Statistics (ONS) reported on Wednesday. The index continues to retreat from its highest level since December 1981.

Meanwhile, the core inflation gauge (excluding volatile food and energy items) rose 6.3% YoY last month versus 6.3% seen in November, missing the forecasts of 6.6%.

The monthly figures showed that the UK consumer prices rose by 0.4% in December vs. 0.4% expectations and 0.4% previous.

The UK Retail Price Index for December arrived at 0.6% MoM and 13.4% YoY, falling short of expectations across the time horizon.

Additional takeaways (via ONS)

“The largest upward contributions to the annual CPIH inflation rate in December 2022 came from housing and household services (principally from electricity, gas, and other fuels), and food and non-alcoholic beverages.”

“The largest downward contribution to the change in both the CPIH and CPI annual inflation rates between November and December 2022 came from transport (particularly motor fuels), clothing and footwear, and recreation and culture, with rising prices in restaurants and hotels, and food and non-alcoholic beverages making the largest partially offsetting upward contributions.”

FX implications

In an initial reaction to the UK CPI numbers, the GBP/USD pair eased toward 1.2300, still up 0.15% on the day.

Why does UK inflation matter to traders?

The Bank of England (BOE) is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase in interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.