UK: Inflation to hit BoE target in 2017 and peak in 2018 – Fidelity

Anna Stupnytska, Global Economist at Fidelity International comments on today’s inflation figures from the UK.

Key Quotes

“UK September headline inflation came in at 1.0% year on year, above expectations of 0.9%. Core CPI also accelerated to 1.5% year on year, above expectations of 1.4%. Clothing and footwear component was a big driver of the increase, suggesting the weakness of the pound has started feeding into import prices.

“Given the recent fall in the pound, around 23% since late 2015 and 17% since the Brexit vote, inflation is set to accelerate further, rising by around 1-2 percentage points from these levels. Inflation is likely to hit the Bank of England’s target of 2% in 2017, before overshooting and peaking sometime in 2018. Further falls in the pound could accentuate this trend.

“With personal incomes growing around 2% in nominal terms, it will not be long before real income growth hits zero, hurting consumption.

“Against the forces of sterling depreciation, a Brexit-related slowdown in activity and consumer demand should provide some offset, keeping inflation in check as we move into next year. But these are unlikely to be sufficient to completely counteract the impact from higher import prices.

“While the Bank of England has signalled that they will overlook the inflation overshoot, I believe they will not ease policy further at their upcoming meeting in November. The recent currency plunge has loosened financial conditions significantly while economic data has been holding up, suggesting the Bank of England is likely to stay in the wait-and-see mode for now.”

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