The UK’s high inflation rate will come down next month, basically because of math. Typically, you can’t make these kinds of definitive predictions in the markets. CPI data has a hidden phenomenon which will be important in this year. Understanding this calculation is very helpful for traders who are trying to predict how central banks may move currencies.
The UK is an outlier in major economies, with inflation consistently in double digits. This CPI calculation is more prominent in the UK, which makes it an easier case to study. Understanding the exaggerated effect in the UK will make it easier to spot in other countries where it’s not so pronounced. Due to the recent global inflation trends, it is applicable to all major currencies. (The yen & yuan being the notable exceptions.)
What does “base effects” mean?
Investors and markets track the change in CPI annually, also known as inflation. This isn’t a direct, raw number, but a calculation based on underlying data. Each month, the government’s statistical department (in the UK, that’s the ONS) calculates the cost of a basket of goods and services, and…