Historic Day for UK's FTSE After CPI Release

The release of the January CPI marked a historic day for the UK's stock market. Inflation fell more than expected on Wednesday, granting the FTSE a fresh record high in a continuation of its steady climb since last October's low.

MoM Deflation Improves Situation for BOE

UK's inflation appears to be continuing the trend of coming off its 40-year high and coming in below expectations at 10.1% compared to the 10.3% forecast. This is still well above peers such as the US and the EU, but core inflation is falling faster in the UK. High energy and food prices remain the most significant contributor to the cost of living crisis, with a notable drop in the price of fuel offset by a rise in alcohol and tobacco.

The sharp deceleration in the monthly CPI reading was more immediately relevant to the markets, with January turning deflationary at -0.6% compared to the expected -0.4%. PPI prices also fell more than expected on input and output, suggesting that the higher annual inflation might have more to do with the comparison to last year's figures and that inflation is coming under control faster than anticipated.

CPI Reaction Down in Stock Market History

The market's immediate reaction was for a weaker pound, as the data was seen easing some of the pressure on the BOE to keep raising rates during a session of increased investor optimism. Subsequently, the UK's index broke the 8k handle for a record high. Growth in wages continues to lag behind inflation, with labour costs growing at 5.9% over the last year. This helps the argument that the BOE doesn't have to raise rates harshly to avoid a wage-price spiral, supporting the FTSE even more.

On the other hand, even core inflation still triples the BOE's target. Recent comments suggest that MPC members (excluding Tenreyo and Dhingra) generally see the need to keep hiking, at least in the near term. In his testimony before Parliament, Chief Economist Pill said he saw no room for complacency in dealing with inflation and was willing to do more to get inflation back down to target.

Can FTSE Continue to Break Records?

Despite peaking at a new record high last week, the FTSE soared past that top and broke above the 8k handle for a new swing at 8045. Above the round base, the measured move projection from the breakout point of the flag correction at 7500 suggests an upward spiral near 8500. If bulls lose the 7903 support, the index could revisit 7687 and the 7500 threshold.

Source: Spreadex

Key Takeaways

The release of January's CPI marked a historic day for the UK's stock market, as inflation fell more than expected and awarded the FTSE a fresh record high. While energy prices remain a significant contributor, core inflation is falling faster than peers, and the fast reading shows deflation. Coupled with wage growth lagging behind inflation, the BOE might not have to raise rates harshly. The FTSE has since broken above 8k, but whether or not it can continue making new records is yet to be seen