Investment Clock insights

UK inflation data – weaker than expected data adds BoE breathing space


Melanie Baker

17 October 2018

In a reversal of developments last month, Consumer Price Index (CPI) inflation surprised consensus on the downside by 2-tenths in September, having surprised on the upside by three-tenths in August.  This is better news for the consumer - inflation is rising at a slower pace than pay growth.  
In coming months, the tight labour market should keep up pressure for pay rises. But, for now, the weaker than expected data today brings the headline inflation figures back into line with Bank of England (BoE) staff forecasts from August. 
September CPI inflation came in weaker than expected at 2.4% year on year (consensus: 2.6%) after 2.7%Y in August. The main drivers of the move down in CPI inflation were largely the same as those pushing inflation up last month (theatre shows, food, sea fares and clothing), offset in part by upward pressure from energy prices (electricity and gas). Computer games - a volatile component- also added to the downward pressure. 
Looking at the bigger picture, core inflation and services inflation both fell back to their levels in July. Measures of core services inflation that we track moved a little below July levels.  It was again the case though, that inflation in most domestic components of CPI (i.e. the ones with lowest import intensity) rose a touch (see chart below).
Domestic inflationary pressure still seems likely to pick up in coming quarters given the UK’s tight labour market and higher pay growth. 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.  

In a reversal of developments last month, Consumer Price Index (CPI) inflation surprised consensus on the downside by two-tenths in September, having surprised on the upside by three-tenths in August.  This is better news for the consumer - inflation is rising at a slower pace than pay growth.  

In coming months, the tight labour market should keep up pressure for pay rises. But, for now, the weaker than expected data today brings the headline inflation figures back into line with Bank of England (BoE) staff forecasts from August. 

September CPI inflation came in weaker than expected at 2.4% year on year (consensus: 2.6%) after 2.7%Y in August. The main drivers of the move down in CPI inflation were largely the same as those pushing inflation up last month (theatre shows, food, sea fares and clothing), offset in part by upward pressure from energy prices (electricity and gas). Computer games - a volatile component- also added to the downward pressure. 

Looking at the bigger picture, core inflation and services inflation both fell back to their levels in July. Measures of core services inflation that we track moved a little below July levels.  It was again the case though, that inflation in most domestic components of CPI (i.e. the ones with lowest import intensity) rose a touch (see chart below).

Domestic inflationary pressure still seems likely to pick up in coming quarters given the UK’s tight labour market and higher pay growth. 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.  

Source: ONS

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