Summary:

• Stagflation is exemplified by the UK as a hostile environment for the pound.
• The headline CPI inflation rate was 11.1% YoY.
• BoE is forced to keep hiking interest rates.

GBP CPI beat market expectations

Stagflation, in which an economy is plagued by rising prices and a lack of growth, is best exemplified by the UK as a hostile environment for the pound. In October, the headline CPI inflation rate was 11.1% year over year, easily surpassing September's reading of 10.1% and beyond the consensus forecast of 10.7%.

According to the ONS, core inflation, which is a better indicator of "home grown" inflationary pressures, increased by 6.5% in October, unchanged from September but higher than consensus expectations of 6.5%. Due to the fact that this is three times greater than the Bank of England's legal target of 2.0%, the Bank is forced to keep hiking interest rates.

The increase in energy costs following the Ofgem price increase in October also contributed to the surge. It should be noted that if not for the government's Energy Price Guarantee, which regulates the amount that households pay for energy, inflation would have been closer to 13.8%. Rising prices and interest rates continue to be a threat to the UK economy, and on Thursday, Chancellor Jeremy Hunt is expected to unveil yet another round of tax increases and spending reductions, adding to the misery.

Market reaction to the GBP CPI inflation

Following some hotter-than-expected UK inflation figures that suggested the Bank of England could not yet afford to stop its interest rate hike cycle, the British Pound plummeted against the Euro, the Dollar, and other major currencies. The FTSE 100 index rallied in the wake of the release of the data. However, we cautioned in our week-ahead forecast that the market might now consider stronger-than-expected inflation as a negative, as rising prices and interest rates would snuff out the UK's prospects for economic development. Normally, such a result would help the Pound.

Sources: poundsterlinglive.com, dailyfx.com