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UK: Upside risk on inflation? – ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    James Knightley, Senior Economist at ING, suggests that UK inflation is likely to creep higher on “base effects” relating to food and fuel, while there are growing upside risks from the service sector.

    Key Quotes

    “Headline consumer price inflation was close to zero throughout 2015 as plunging food and fuel prices offset rising prices in other components. Nonetheless, with fuel prices not falling as much in January 2016 as they did in January 2015 we are likely to see the annual rate of headline inflation edge a touch higher. We also suspect that deflationary forces in food inflation have eased, which will also help push headline CPI up to 0.3%YoY from 0.2%.

    Core inflation is likely to remain at 1.4% with service sector inflation looking fairly strong right now after the recent spike in airline and ferry fares. In the coming months, cuts to utility bill prices will exert a downward influence, but sterling’s plunge will mean that import prices will start to come under more upward pressure. As such, inflation is likely to remain subdued through the first half of this year, but positive.

    With Wednesday’s UK labour report set to show wage growth remaining a rather mediocre 2%, the Bank of England is under no pressure to alter its policy stance. Moreover, the Brexit vote uncertainty poses clear risks for growth, particularly through the investment and hiring channels. As such there is zero prospect of BoE action ahead of the EU referendum, which looks set to be confirmed for June after the EU leaders’ summit concludes later this week.

    Nonetheless, we continue to have November as the probable start point for UK rate hikes, assuming the UK votes to remain an EU member state. The labour market is tight and we think it is only a matter of time before wages show more upward momentum. Sterling’s plunge will add to upside inflation risks while we look for commodity prices to stabilise and gradually rise in the second half of the year as Chinese stimulus efforts start to bear fruit. In fact we would not be shocked to see inflation reach 3% next year, which would see a dramatic re-pricing of the path of monetary policy.”
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