James Knightley, Senior Economist at ING, notes that the UK inflation rose to 1% and pipeline price pressures are building, but the BoE is prepared to "look through" this situation and continues to focus on a relatively gloomy medium term growth outlook.
“UK headline consumer price inflation rose a little more than the market expected in September. It came in at 1%YoY, the highest inflation rate since November 2014. This has been a fairly sharp turnaround – it was negative late last year and was just 0.6% only last month. Sterling’s weakness has been the main driver, having plunged 16% on a trade weighted basis since the EU referendum and is down 22% since last November. We have seen the effects of this most markedly in energy and clothing prices so far.
This trend will continue with sterling’s plunge significantly pushing up the price of imported products. Producer price inflation is running even faster at 1.2% while input prices are rising 7.2%. We look for headline consumer price inflation to push up to 3% next year.
Rising inflation and this week’s other UK data, which includes retail sales and employment numbers on the face of it don’t really support the idea of a rate cut at the November MPC meeting and financial markets are pricing in just a 6% chance of such a move. However, economists see a much higher probability, which reflects comments from the BoE suggesting that officials will “look through” temporary higher inflation. Moreover, they suggested that should the economic outlook remain as gloomy as they were predicting in August, they would likely cut rates again. We doubt that there will be any significant changes in the outlook for 2017 and 2018 and so think that the chances still narrowly favour further stimulus.”