Investment Clock insights

Brewing domestic inflationary pressure is likely to keep the BoE on track for rate rises... Brexit permitting


Melanie Baker

14 November 2018

Both the labour market data yesterday and inflation data today suggest further rate rises are likely from the Bank of England (BoE) once we are through the worst of the Brexit uncertainty (assuming that there actually is a deal). In the meantime, there was some good news for consumers with pay growth still on a rising path, but stable inflation. 
Headline Consumer Price Index (CPI) inflation was a tenth weaker than expected in October at 2.4%, year on year. Core CPI inflation, as expected was stable at 1.9%, year on year though.  The details are a bit of a mixed bag, but breaking the data down by import intensity gives you a bit more feel for what is going on under the surface. There is an ongoing drag on inflation from the most import-intensive (ex-energy) bits of inflation. Helping to offset that is a rise in inflation in the least import intensive bits of inflation.  That may reflect rising domestic underlying inflationary pressure.  My measures of core services inflation ticked up a bit, but still aren’t showing a clear upward trend. However, with pay growth having risen, I still expect these to pick-up.
More signs of rising domestic inflationary pressure, alongside continued signs of a tight labour market suggest the BoE will raise rates again once we are through this batch of Brexit uncertainty (assuming we actually get an approved and ratified withdrawal deal). For now, we still expect a rate rise in May 2019.

Both the labour market data yesterday and inflation data today suggest further rate rises are likely from the Bank of England (BoE) once we are through the worst of the Brexit uncertainty (assuming that there actually is a deal). In the meantime, there was some good news for consumers with pay growth still on a rising path, but stable inflation. 

Headline Consumer Price Index (CPI) inflation was a tenth weaker than expected in October at 2.4%, year on year. Core CPI inflation, as expected was stable at 1.9%, year on year though.  The details are a bit of a mixed bag, but breaking the data down by import intensity gives you a bit more feel for what is going on under the surface. There is an ongoing drag on inflation from the most import-intensive (ex-energy) bits of inflation. Helping to offset that is a rise in inflation in the least import intensive bits of inflation.  That may reflect rising domestic underlying inflationary pressure.  My measures of core services inflation ticked up a bit, but still aren’t showing a clear upward trend. However, with pay growth having risen, I still expect these to pick-up.

More signs of rising domestic inflationary pressure, alongside continued signs of a tight labour market suggest the BoE will raise rates again once we are through this batch of Brexit uncertainty (assuming we actually get an approved and ratified withdrawal deal). For now, we still expect a rate rise in May 2019.

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