On the Taylor Swift effect on British inflation figures – Commerzbank

Yesterday’s UK employment data once again underlined why the markets are quite bullish on the British Pound (GBP): employment growth was very strong, surprisingly pushing the unemployment rate to its lowest level in half a year . Wage growth slowed, but including bonuses it slowed slightly less than expected. So the UK labor market appears to remain very strong and does not require an urgent interest rate cut, notes Michael Pfister, FX analyst at Commerzbank.

Risk of faster rate cuts rising in UK

“This is likely to have been an anomaly, as most of the increase was due to an extraordinary increase in travel prices – seasonally adjusted, these prices rose almost 2% month on month, the highest level since early 2022. As in other European countries, this could be related to Taylor Swift’s world tour. She gave five concerts in London in August, which likely increased airfares and hotel prices significantly.

“This effect is likely to be partially reversed in September. Consequently, service prices should have risen at a much slower pace, i.e. they should have returned to the trend in wage growth. This is also supported by the fact that only travel prices rose exceptionally strongly in August. Other components of services inflation, such as recreation and culture prices, are more closely linked to wage growth and have risen at a much slower pace. “There is much to suggest that the brief rally in August will ease.”

“We think a more gradual pace of rate cuts is more likely, which should support the pound in the coming months. However, the risk of faster rate cuts is also increasing in the UK, especially if inflation turns out to be significantly lower than expected. If we see this today, we could see a sharp correction in the Pound, although this is not our base case.”