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UK CommentJanuary CPI inflation in line with the Bank of England's expectation

CPI inflation unchanged at 3.0 percent in January, CPI core inflation up to 2.7 percent from 2.5 percent in December
UK CPI inflation was unchanged at 3.0 percent y-o-y in January. This was in line with the Bank of England’s expectation, but slightly higher than the consensus expectation of 2.9 percent. Core inflation increased to 2.7 percent in January from 2.5 percent in December and beat the consensus expectation of 2.6 percent. Compared with December the annual inflation rate was pulled up by recreation and culture as well as clothing and footwear, while transport in particular pulled down as prices for motor fuels rose less than a year ago. Cost pressure, as measured by the PPI input index, was a little higher than expected, with the 12-month growth rate down to 4.7 percent in January, from 5.4 percent in December (revised from 4.9 percent). The consensus was 4.5 percent. On the other hand, PPI output inflation was a little weaker than expected at 2.8 percent, down from 3.3 percent in December. The consensus expectation was 3.0 percent. It seems that the deceleration in the PPIs has eased slightly over the past few months. Also, the input price indicators in the PMI surveys suggest that imported cost pressure has remained high.
Bank of England needs to see increasing wage growth to hike policy rate
Nevertheless, the PPIs and the GBP movements suggest that consumer price inflation has peaked, and this is also what the Bank of England expects. In the Bank of England forecast, CPI inflation eases to 2.9 percent in February and 2.8 in March and further to 2.4 percent in Q4 this year. The Bank of England warned last Thursday that the policy rate might have to be hiked sooner and to a greater extent than the market rates indicated. This expectation is based on an expectation for wage growth to pick up more meaningfully in 2018. So, in addition to keeping an eye on potentially higher-than-expected imported cost pressure in the coming months, wage growth will be key in judging whether or not the Bank of England will be able to hike the bank rate as early as May. Currently the market prices in a likelihood of just over 63 percent for a May hike. This is up from 62 percent just before today’s inflation numbers.


 


 


 


Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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