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UK falls back into deflation trajectory – ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Oct 13, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – James Knightley, Research Analyst at ING, notes that the UK September headline inflation has dipped back into deflation territory at -0.1%YoY versus expected 0% reading.

    Key Quotes

    “Lower fuel prices continue to be a key factor while there appears to have been more aggressive discounting than expected in clothing and footwear. August was wetter and colder than usual so it seems probable that retailers were left with excess stock of summer fashions that they need to shift as we head into autumn (clothing and footwear went from +0.6%YoY to -0.6%YoY). Interestingly, the deflationary influence from food (the supermarket price war) appears to be showing some tentative signs of easing.”

    “A key theme is the divergence between goods prices (-2.4%YoY) and services (+2.5%YoY). With wages being the key cost for most service sector businesses, the pick-up in pay appears to be exerting upward pressure on prices.”

    “With tomorrow’s labour report possibly showing private sector pay topping 4% we suspect that service sector price inflation will continue to push higher in an environment of strong consumer demand.”

    “Therefore, with oil prices appearing to have found a floor, sterling having softened a little and the supermarket price war perhaps having less of a depressing impact on food prices we see the potential for headline CPI to pick up relatively swiftly. 1%YoY seems achievable in late 1Q16/early 2Q16. The market pricing of the first BoE move coming in early 2017 seems difficult to square with this outlook.”
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