Market Overview

UK CPI Preview: Only 1-year Forward Inflation Is Important

  • UK inflation is expected to accelerate slightly to 2.5 percent y/y in July while core inflation is set to remain steady at 1.9 percent y/y.
  • The Bank of England hiked the Bank rate at the beginning of August with the view of external cost pressures like Sterling’s past depreciation and higher energy prices easing while domestic factors like wage growth are seen taking over.
  • As the Bank of England stressed that further policy rate adjustments are going to be gradual and limited, not the current, but forward inflation in 1-year time from now is important.

The consumer price index (CPI), or headline inflation is expected to accelerate slightly in July to 2.5 percent over the year from 2.4 percent in June, the core inflation stripping the consumer basket off food and energy prices is expected to remain stagnant at 1.9 percent y/y, the Office for National Statistics is set to report on Wednesday, August 15 at 8:30 GMT.

The headline inflation is likely to be affected by the seasonal prices of recreational services and traveling expenses while core prices are expected to remain stable after decelerating sharply in June to 1.9 percent y/y, the lowest level since March 2017.

With respect to the monetary policy, the inflation in July is unlikely to influence any near-term expectations as the Bank of England has just delivered the Bank rate hike at the beginning of August saying the inflation in the UK is expected to be influenced to the greater extent by domestic price pressures while external pressures including past Sterling’s depreciation or/and oil prices  are expected to fade away.

“The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise,” the Bank of England wrote in its August Inflation Report. 

While hike the Bank rate the Bank of England remained dovish emphasizing the outlook for only gradual and limited future increases of the Bank rate. The outgoing external Monetary Policy Committee (MPC) member Ian McCafferty said recently that the market expectations for a couple of rate hikes during the next two years are acceptable with August Inflation Report projections conditioned on the Bank rate rising to 1.0 percent by Q1 2020 and then edging higher to 1.1 percent by Q3 2021.

So while inflation itself becomes a bit of a boring indicator in terms of its relevance to monetary policy, it is still greatly affecting the growth rate of the UK economy. The combination of nominal wage growth and inflation rate returns real wage growth that is a very serious indication of total demand in the UK economy. For now, inflation-adjusted wages increased by 0.4 percent y/y excluding bonuses while rising 0.1 percent  y/y including bonuses, so with inflation accelerating the real wages will once again stand at the brink of falling into negative. 

Posted-In: FXStreetNews Eurozone Markets


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