Investment Clock insights

UK inflation: Stronger than expected; raising questions for the Bank of England


Melanie Baker

19 September 2018

There was bad news for the consumer as inflation moved higher in August, now rising at a faster pace than some measures of pay growth.  In coming months, the tight labour market should keep up pressure for pay rises. Meanwhile, the stronger than expected inflation data raises some questions for the Bank of England (BoE).  
August Consumer Price Index (CPI) inflation came in higher than expected at 2.7%year on year (consensus: 2.4%), that’s higher than July’s 2.5% and contrasts with the move lower in both US and euro area inflation in August. Looking beneath the surface, core inflation and services inflation both rose. Measures of core services inflation that we track also moved higher.
The main drivers of the move up in headline CPI inflation included theatre shows, computer games, seafares and clothing. Some of these impacts may well reverse and there was some downward pressure from mobile phone charges, furniture and households goods (the latter two perhaps partly reflecting the past boost from sterling weakness wearing off).
Nevertheless, today’s figure looks likely to surprise the BoE somewhat.  As of August, BoE staff were projecting 2.4% inflation for August, and that was before July’s small downside surprise.  
Domestic inflationary pressure seems likely to pick up in coming quarters. Brexit permitting, that should leave the BoE on track to raise rates next year once at least some of the Brexit uncertainty is behind us.  

There was bad news for the consumer as inflation moved higher in August, now rising at a faster pace than some measures of pay growth.  In coming months, the tight labour market should keep up pressure for pay rises. Meanwhile, the stronger than expected inflation data raises some questions for the Bank of England (BoE).  

August Consumer Price Index (CPI) inflation came in higher than expected at 2.7%year on year (consensus: 2.4%), that’s higher than July’s 2.5% and contrasts with the move lower in both US and euro area inflation in August. Looking beneath the surface, core inflation and services inflation both rose. Measures of core services inflation that we track also moved higher.

The main drivers of the move up in headline CPI inflation included theatre shows, computer games, seafares and clothing. Some of these impacts may well reverse and there was some downward pressure from mobile phone charges, furniture and households goods (the latter two perhaps partly reflecting the past boost from sterling weakness wearing off).

Nevertheless, today’s figure looks likely to surprise the BoE somewhat.  As of August, BoE staff were projecting 2.4% inflation for August, and that was before July’s small downside surprise.  

Domestic inflationary pressure seems likely to pick up in coming quarters. Brexit permitting, that should leave the BoE on track to raise rates next year once at least some of the Brexit uncertainty is behind us. 

Upward drivers of inflation included some of the most ‘domestic’ components 

Source: Office for National Statistics as at 31 August 2018

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.