Oil free inflation could be core to BoE hike

• UK core CPI shows why rates have to rise sooner rather than later
• Chinese selloff threatens to further derail US inflation
• FOMC minutes fail to include key jobs data, highlighting timing issue

Global markets eased lower today, as rising UK core inflation highlighted the fact that it’s only a matter of time before rates in both the UK and US will rise in anticipation of higher inflation. The 50% rise in core inflation to 1.2% shows that when stripping out the impact of lowered energy prices, the UK is on a clear upward trajectory which will both reassure and worry the BoE in equal measure. Monday’s comments from BoE’s Kristin Forbes couldn’t have come at a better time, highlighting that there’s a 2-year lag between interest rate changes and inflation, meaning rates will need to rise well before CPI goes anywhere near 2%. Central banks will of course factor in commodity prices, yet their inherent volatility and unpredictability means that for many policy makers the core inflation figure is more important than the headline one, especially given the current commodity price crisis. This may only be one month’s data, yet there is no doubt that it will make the MPC take notice.

The largest selloff in Chinese stocks in over three weeks points to continued weaknesses in both confidence and sentiment despite recent measures by the PBoC and ruling party. Given last week’s yuan devaluation, markets now see another such decision to be an option in the face of any further weakness. With the US representing the largest importer of Chinese goods, any such devaluation would drive imported deflationary pressures, which could in turn lead to yet another reason for the Fed to hold off on a rate hike. The problem here is that no one trusts the Chinese marketplace owing to the inexperience and unpredictability of regulators and ruling bodies.

The relative calmness of markets today has been driven by anticipation of the FOMC minutes which are released in the US tomorrow. While the minutes provide a possible platform to alter expectations around whether September is the likeliest time for a rate hike, ultimately they date from a time prior to the release of the very solid August jobs report and therefore things have moved on since the actual meeting. It really highlights the value of releasing minutes along with the decision, as is the current BoE procedure. Ahead of the FOMC minutes tomorrow we get the latest US CPI data, where a similar rise to that seen in the UK today would have the potential to drive further US indices weakness and dollar strength.