UK core output producer prices (PPI) month-on-month, not seasonally adjusted, increased to 0.2% in January.
This followed a reading of -0.1% in the previous month.
Rising Factory Gate Inflation
The January rise in core producer prices from -0.1% to 0.2% is a clear warning sign for us. This shift indicates that the disinflationary trend we saw through most of 2025 may be reversing at the factory gate. It suggests that cost pressures are building again, which will likely feed into consumer prices soon.
This data point is especially significant when viewed alongside the latest Office for National Statistics report, which showed UK headline CPI inflation holding stubbornly at 4.0% in January. With services inflation also remaining elevated above 6%, this producer price uptick reinforces the view that the “last mile” of getting inflation down will be the hardest. The Bank of England will be watching this very closely.
Given this, we believe the market is too optimistic about the timing of Bank of England rate cuts. This producer price inflation makes a rate cut before the summer much less likely. Policymakers will want to see several months of cooling data before considering a move, a pattern we saw them follow back in 2024.
Therefore, we should consider selling short-term Sterling Over Night Index Average (SONIA) futures contracts for the second half of the year. This position will profit if the market reprices to expect fewer rate cuts than are currently anticipated. The risk of rates staying higher for longer has materially increased with this data.
This outlook should also be supportive for the British Pound, as higher-for-longer interest rates increase the currency’s appeal. We see an opportunity in buying GBP/USD call options with expirations in April and May. This allows us to gain upside exposure to a stronger sterling while limiting our downside risk.
Implications For UK Equities
For UK equities, this is a headwind, particularly for rate-sensitive sectors like real estate and construction. We should consider buying put options on the FTSE 250 index, which is more domestically focused than the FTSE 100. This provides a hedge against a potential market downturn if investors begin to fear a more hawkish central bank.
