UK reaction: CPI inflation - Bank escapes writing a letter

Key points:

  • UK CPI inflation fell short of expectations and at 3.0% does not require a letter from Bank of England (BoE) Governor Carney.
  • CPI inflation mixed ongoing sterling-depreciation driven gains with falls in housing, fuel and other miscellaneous items.
  • We consider CPI inflation likely to have peaked at this level and envisage a lower level of inflation by year-end.
  • The BoE is unlikely to be unduly moved by today’s release. However, a persistently weaker-than-expected inflation would reduce the need for the scale of additional tightening required from here.  

UK Consumer Price Index (CPI) inflation came in a little softer than our expectation in October, remaining at 3.0% (consensus and AXA IM 3.1%). October’s was the fastest pace of inflation (accelerating to 3.00% from 2.96% the previous month) since April 2012. Importantly, with the Bank’s mandate including a requirement for the Governor to write a letter explaining deviations from the Bank of England’s 2% target only when inflation veers by more than 1% away from target, October’s inflation print spares the Governor from reaching for his pen this time. Moreover, while inflation can be volatile on a month-to-month basis, our forecasts and forward-looking producer price inflation, both suggest that inflation is unlikely to climb higher over the coming months. On balance we see a greater chance that inflation begins to fall gently by year-end.

Today’s CPI inflation print included a number of moving parts. Inflation continued to be elevated by the decline in sterling. This was evident in the rise in (imported) seasonal food and recreational prices and to a lesser extent in healthcare (pharmaceutical products) and electricity costs. Second hand car and transport services costs also rose. However, these increases were broadly offset by declines in housing and household services costs (including rents) and furniture and household goods (including furniture, furnishings, carpets and household appliances), which suggest that a stagnant housing market may also be having an impact. Auto fuel, telephone and equipment and other financial services costs also fell. On balance, downside surprises dominated for us, including in other services, furniture et al and education costs, which we had expected to see increase faster this time around.

Retail Price Index (RPI) inflation was consistent with CPI inflation, coming in at 4.0%, modestly softer than the 4.1% consensus estimate. The difference between RPI and CPI has remained around 1% point since mid-2014 and we expect this to persist in broad terms over the coming 18-months. The difference is yet to reflect the rise in Bank Rate to 0.50%, we would expect this to emerge in December’s inflation print.

Today’s inflation print was also a touch softer than the Bank of England forecast for October. The Bank will not read too much into one month’s outturn. However, if a relatively softer tone in inflation were to persist, it would, over the medium term, reduce the urgency for further Bank Rate hikes. However, as we do not expect the next move from the Monetary Policy Committee (MPC) until the second half of next year, the Bank will have plenty of time to judge if underlying inflation pressure is materialising as it fears before considering a further move. Financial markets reacted modestly to the release with 2-year and 10-year yields inching lower by 2bps to 0.47% and 1.32% respectively and sterling falling by just over 0.25% to the US dollar and euro.         


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