UK core output producer price inflation (PPI), year on year and not seasonally adjusted, was 2.9% in January.
This was down from 3.2% in the previous period.
Core PPI Signals Easing Price Pressures
Core factory gate inflation fell to 2.9%. This is an important signal for us. Producer prices often move before consumer prices. So this suggests the Bank of England may face less pressure to keep interest rates high. We are now expecting a more dovish policy path in the coming weeks.
In the rates market, this supports earlier Bank of England rate cuts. We are watching Short Sterling or SONIA futures. We expect contracts for the second half of the year to rally as the market prices in easier policy. This is a clear change from the more cautious view we had a few months ago.
For the pound, this is bearish. If rate expectations fall, sterling becomes less attractive to hold. We expect the pound to weaken against the dollar, especially if the US Federal Reserve keeps rates higher for longer. We are considering buying GBP put options to hedge or to position for a further drop.
This backdrop could help UK stocks. Lower borrowing costs can support valuations. A weaker pound can also lift overseas earnings when they are translated back into sterling, which matters for many FTSE 100 companies. We see potential upside in FTSE 100 futures and call options.
This PPI reading also fits with other recent data. January CPI cooled to 3.4%, down from 3.9% in December. This trend matches the Bank of England’s cautious tone and suggests it is moving closer to a policy shift. The market is now pricing a 75% chance of a rate cut by August, up sharply from last month.
Market Implications For Rates FX And Equities
After the aggressive rate-hiking cycle of 2024 and early 2025, continued disinflation suggests the inflation fight is largely being won. The focus is now shifting from reducing inflation to supporting growth. That change in the story is likely to drive market returns over the next quarter.
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