EUR GBP Drops as Inflation Surge Pressures Bank of England

The EURGBP exchange rate was lower by -0.12% and trading at new lows in the year as the UK inflation number beat expectations. The yea-on-year inflation rate surged to 5.4% against expectations of 5.2% as goods increased in price across the board. The inflation release was steady for Germany at 5.3% and that also boosted sterling.

The EUR to GBP rate was trading at 0.8315 with the 2020 lows near 0.8300.

Bank of England pressured after another inflation surge

UK inflation surged to its highest level since March 1991 during December, the Office for National Statistics said.

The Consumer Prices Index rose by 5.4% in the year to December 2021, up from 5.1% in November. On a monthly basis the index jumped 0.5% in December 2021, compared with 0.3% in December 2020.

Clothing, furniture and food saw the largest, which goes against the narrative of ‘transitory’ inflation and will put pressure on the Bank of England to take action on interest rates. Clothing prices were up 0.7% in December. December’s move higher in clothing was driven by a rise in consumer prices across womens and children’s footwear. Meanwhile, accessories partially offset the overall increase.

ONS chief economist, Grant Fitzner, said: “The inflation rate rose again at the end of the year and has not been higher for almost 30 years.

“Food prices again grew strongly, while increases in furniture and clothing also pushed up annual inflation. These large rises were slightly offset by petrol prices, which despite being at record levels were stable this month but rose this time last year. The closures in the economy last year have impacted some items but, overall, this effect on the headline rate of inflation is negligible,” he added.

German inflation at its highest level in 18 years

Germany is also facing inflationary pressures with annual inflation in 2021 up by more than three percent, climbing to the highest level since 1992. Germany’s Federal Statistical Office said that after a further price hike for consumers in December, inflation reached 3.1 percent on the year.

The latest figures come as the German economy shrank by one percent in the final three months of the year, with reduced output from Europe’s largest economy due to virus-related shortages, energy prices and supply chain disruptions.

The Federal Statistical Office said the economy grew by 2.7 percent in 2020, but the final quarter was a disappointment.  Although the latest growth figures were an improvement on last year, Europe’s largest economy is still trailing behind other key economies, such as the UK, France and the US.

Georg Thiel, President of the statistics agency Destatis, said: “Despite the ongoing pandemic situation and increasing supply and material bottlenecks, the German economy was able to recover after the slump in the previous year, although economic output has not yet reached the pre-crisis level.”

The new German Chancellor Olaf Scholz has been criticised for “exacerbating the inflation problem” and “ignoring the needs of citizens”.

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