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UK CommentUK inflation somewhat lower than expected in January, but cost pressure is building faster

  1. CPI inflation 1.8% y-o-y in January, up from 1.6% in December (consensus: 1.9%)
  2. Core inflation unchanged at 1.6% in January (consensus: 1.7%); PPI input inflation highest since 2008
  3. Inflation probably not high enough for the BoE to lift rates, we believe
CPI inflation 1.8% y-o-y in January, up from 1.6% in December (consensus: 1.9%)
The CPI rose by 1.8 percent y-o-y in January, up from 1.6 percent in December. The rate in January 2017 was the highest since June 2014, but was still 0.1 percentage points lower than the consensus expectation of 1.9 percent for January. Core CPI inflation also came in 0.1 percentage points lower than expected at 1.6 percent y-o-y in January, unchanged from December. Behind the rise in the CPI 12-month rate was a monthly fall in the CPI of 0.5 percent between December and January compared with a larger fall of 0.8 percent between the same two months a year earlier. According to the ONS, the main contributors to the increase in the 12-month rate were rising prices for motor fuels and to a lesser extent food prices, which were unchanged between December and January, having fallen a year ago. These upward pressures were partially offset by prices for clothing and footwear, which fell more than they did a year ago.
PPI input inflation highest since 2008
The CPI inflation may have been somewhat lower than the consensus expectation in January, but cost pressures are building faster than expected. PPI input inflation accelerated to 20.5 percent y-o-y in January, an increase from an upwardly revised 17.0 percent in December, solidly beating the consensus expectation of 18.5%. The January PPI input inflation is the highest since September 2008. PPI output inflation was also higher than expected and came in at 3.5 percent in January, up from 2.8 percent in December. The consensus expectation was 3.2 percent.
Inflation probably not high enough for the BoE to lift rates, we believe
CPI inflation has risen markedly over the past year and appears on track to hit the Bank of England’s expectation of returning to the 2% target by February. Looking ahead, the BoE expects CPI inflation to reach 2.8% y-o-y in January next year, buoyed by higher import prices following sterling’s depreciation. The BoE expects higher import prices to have their greatest effect on CPI inflation in around a year’s time, but still to be pushing inflation above the 2% target at the end of the forecast period in Q1 2020. The BoE is worried that a period of above-target inflation could present a risk to domestic cost pressures if it were to lead to markedly higher inflation expectations that, in turn, influence wage and price-setting decisions. Therefore, the BoE has noted that there are limits to the extent that above-target inflation can be tolerated. We continue to expect that inflation will accelerate over the coming year, but not become high enough for the BoE to raise rates this year or the next, as weakening GDP growth will probably keep wage growth subdued.

 



 


Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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