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UK Inflation beats expectations - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 12, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    James Smith,Economist at ING, suggests that the core inflation (at 1.5%) is creeping closer to target, which alongside an expected boost from higher import prices this year, will put pressure on the BoE to hike rates should the UK vote to remain in the EU.

    Key Quotes

    “The UK’s March inflation data provided a positive surprise, with both the headline and core rates of CPI coming in above consensus. The headline rate ticked up to 0.5% YoY, led by another large increase (23% MoM!) in airfares. This is most likely attributable to this year’s Easter break taking place in March (as opposed to April), which we would expect to work in the opposite direction next month.

    Ultimately, this is just noise and the decline in food prices during March (-0.6 MoM) was more interesting. As the supermarket price war (which has helped drive down food prices by 5.5% since early 2014) has showed signs of losing steam, we expect food prices to act as less of a deflationary influence over the coming months.

    Ultimately, in advance of this week’s Bank of England meeting, the key focus for the MPC is still the forthcoming UK referendum in June. However, the pound has depreciated by around 11% since mid-November and this should start to push up the cost of imported products over the coming months – something which should be increasingly noticeable in the second half of this year.

    If the UK votes to remain in the EU, then these medium term inflation pressures will be a key determinant of when the BoE will hike interest rates. As today’s data showed, core inflation (now at 1.5%) is creeping closer to the 2% target and with further pass-through from higher import prices expected, we remain comfortable with our call for a November rate hike (assuming no UK EU exit).”
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