On February 19, 2025, the Office for National Statistics (ONS) reported that the UK’s Consumer Prices Index (CPI) rose to 3.0% in January, up from 2.5% in December 2024. This marks the highest inflation rate in ten months and surpasses the Bank of England’s (BoE) 2% target. The unexpected surge was primarily driven by rising airfares, increased food prices, and a significant hike in private school fees following the government’s imposition of a 20% value-added tax on these institutions.
Market Response: FTSE 100 Under Pressure
In response to the inflation data, the FTSE 100 index experienced a decline, reflecting investor concerns over potential shifts in monetary policy. The index closed at 8,737.54, down 29.19 points or 0.33% from the previous session.
Technical analysis indicates that the FTSE 100 is forming a head and shoulders pattern, a bearish signal suggesting potential further declines. The price has already breached the 20-day moving average and is approaching the 60-day moving average, which may act as a support level. A decisive break below this could see the index targeting the 8,560 support level. Additionally, the Relative Strength Index (RSI) and MACD are both trending downward, reinforcing the bearish outlook.
Implications for Bank of England Policy
The unexpected rise in inflation complicates the BoE’s monetary policy stance. Previously, the central bank had signalled a dovish approach, considering interest rate cuts to support economic growth. However, with inflation exceeding the target, the BoE may need to reassess its strategy to balance controlling inflation with fostering economic expansion. Analysts suggest that the higher-than-expected inflation, coupled with robust wage growth, could delay anticipated rate cuts, as the BoE aims to prevent the economy from overheating.
Investor Outlook
Investors are advised to monitor upcoming economic indicators and BoE communications closely. The current environment of rising inflation and potential monetary tightening may introduce increased volatility in the equity markets. Diversification and a cautious approach could be prudent strategies in navigating the evolving landscape.
