UK core output producer prices (PPI) rose by 0.2% month-on-month (not seasonally adjusted) in January.
This followed a -0.1% reading in the prior month.
Rising Factory Gate Inflation
The move in core producer prices from -0.1% to 0.2% in January is a clear warning sign. It suggests the disinflation trend seen through much of 2025 may be fading at the factory gate. In other words, cost pressures could be building again, and these may flow through to consumer prices in the months ahead.
This matters even more when set against the latest Office for National Statistics data, which showed headline CPI stuck at 4.0% in January. Services inflation also stayed high, above 6%. Together, these figures support the view that the “last mile” of lowering inflation will be the toughest. The Bank of England will likely watch this closely.
Because of this, the market may be too hopeful about how soon the Bank of England can cut rates. A rise in producer price inflation makes a rate cut before summer less likely. Policymakers will probably want to see several months of cooler data before acting, as they did in 2024.
Given that setup, we should consider selling short-term Sterling Over Night Index Average (SONIA) futures for the second half of the year. This trade can benefit if markets reprice toward fewer rate cuts than they expect today. The risk that rates stay higher for longer has increased after this release.
This “higher for longer” backdrop can also support the British Pound, since higher interest rates tend to improve a currency’s appeal. We see a potential opportunity in buying GBP/USD call options expiring in April and May. This gives upside exposure to a stronger pound while limiting downside risk.
Implications For UK Equities
For UK equities, this is a headwind—especially for rate-sensitive sectors such as real estate and construction. We should consider buying put options on the FTSE 250, which is more UK-focused than the FTSE 100. This can help hedge against a potential sell-off if investors start to price in a more hawkish Bank of England.
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