UK CPI Preview: Inflation set to derail wages keeping household spending lower
|During the data-intensive week ahead of Christmas and the New Year’s Day celebrations, there are important data due that headline the week.
Most importantly it is the inflation in the UK in November that will cross the wires on Tuesday at 8:30 GMT. The CPI inflation is expected to rise 0.2% m/m in November with the annual increase remaining at 3.0% y/y. The core inflation rate that excludes volatile food and energy items is also expected to remain at the unchanged rate of 2.7% in November.
There are important factors that are having an influential effect on UK inflation. Most important is the food and energy prices. While food prices are a factor of the exchange rate development, the motor fuel prices as calculated in CPI depend on how oil price move on the commodity markets and how Sterling’s exchange rate move, but with some delay.
Consumer surveys on motor fuel though indicate, that the UK consumers paid about 2.2p more for Unleaded and 2.3p more for Diesel in November adding to inflation dwelling on multi-year peak bringing the inflation-adjusted wages to negative and weighing on consumer spending in general.
Oil and FX market effect on CPI
Sterling appreciation can affect CPI in a positive way decreasing the import prices, while Sterling’s depreciation is having a negative effect on UK inflation taking it higher. Nevertheless, there is no straightforward effect of oil prices on commodity markets linked to CPI. Rather than computing exchange rate effect on CPI directly, consumer surveys prove to be a better indication.
While the North Sea Brent prices rose 7,3% over the month in October 2017 and the Sterling lost 1.3% against the US Dollar at the same time, the motor fuel prices in October CPI report were a downward contributor to inflation according to ONS.
“Within transport, the main downward effect came from motor fuels, which also made the largest downward contribution to the overall CPIH 12-month rate. Prices fell by 0.4% between September and October 2017, having risen by 2.3% a year earlier,” the ONS wrote in the October CPI report.
The Fuel report in for October though correctly indicated generally lowest prices in the UK in October saying that “Unleaded prices have fallen 2.8p from 119.8 p/litre to 118.0 p/litre and Diesel prices have dipped 0.2p from 120.5p to 120.3p”.
With GBP/USD appreciating 1.8% over the month of November and Brent oil prices rising 2.8% during the same period of time, oil prices should have remained steady in November. The consumer survey from AA though says that Unleaded prices rose 2.2p from 118.0 p per litre to 120.2 p per litre while Diesel prices have gone up 2.3p from 120.3p per litre to 122.6p per litre. According to AA, the oil prices should positively contribute to UK inflation in November supporting its rise.
UK Fuel prices in November 2017 according to AA
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