UK Inflation Drops More Than Expected and GBP drops follows

Sterling dropped abruptly on Wednesday after data on UK inflation came in substantially below market estimates.

The pound was recently lower by 0.54% to $1.4208. Sterling had climbed on Tuesday to $1.4376, the highest level since the Brexit vote in June 2016.

Inflation fell much more sharply than expected in March, raising questions over whether the Bank of England will push forward with a widely expected increase in interest rates in May. UK economic data outcomes have increasingly underperformed relative to consensus forecasts in recent months, warning that analysts’ models may be overly rosy and opening the door for another downside surprise. Such a result may clash with a recent build in priced-in BOE rate hike expectations, cooling bets on a near-term increase and sending the British Pound lower.

The annual change in the consumer price index fell to 2.5% in March from 2.7% in February. Analysts had expected the rate of inflation to remain unchanged.

How and why did it happen though? The decline in the headline inflation rate came from a fall in the rate of goods inflation from 3% in February to 2.4% in March. Goods prices are thought to be more sensitive to the exchange rate. The year-on-year change in the retail price index, which is used in some government debt contracts, fell to 3.3% from 3.6%.