UK CPI Preview: Brexit above all else

• Annual inflation expected to be unchanged at the BOE 2% target, lower on the month
• Core rate to rise, monthly rate down
• Brexit dominates economic discourse, BOE awaiting political developments

The Office for National Statistics will issue the June figures for consumer prices at 8:30 GMT, 4:30 EDT on Wednesday July 17^th.

Forecast

The monthly change in the consumer price index is expected to be flat in June down from 0.3% in May. The annual rate is predicted to be unchanged at 2 %. The core CPI rate is forecast to be flat in June, after gaining 0.2% in April. The yearly core CPI will rise to 1.8% from 1.7%.

The Brexit Economy

Despite the vote to leave the European Union in June 2016, the British economy performed well for most of the last three years.

Inflation in the United Kingdom has been trending down for almost two years.  From 3.1% in November 2017 it had slipped to 1.8% this past January with a return to 2.1% in April and 2% in May.

FXStreet

Economic growth in the British Isles declined for much the same period from 2.9% in June 2017 to 1.1% in December 2018 and back to 1.5% in May.

Reuters

Employment has been more stable in the past two years. The major decline in the 12-month moving average for the absolute change in jobs came from July 2016 to January 2017 when it dropped by more than half, 156,900 to 70,500.  Since then the average has kept to a range from that January 2017 low to 114,400 in February this year with the majority of readings between 75,000 and 100,000.  

Reuters

Unemployment fell throughout the period reaching a 45 year low of 3.8% two months ago.

Reuters

Bank of England Rate Policy, the economy and Brexit

The Bank of England was two years behind the Federal Reserve in its attempt to normalize rate policy when it began to raise the base rate in the fall of 2017. 

The generally positive outlook for the UK economy for much of the post-Brexit vote period let the bank enact two hikes, lifting the base rate from 0.25% to 0.75% despite the uncertainty created by the political exit puzzle. The last increase was almost a year ago in August 2018.

Reuters

With the failure of Theresa May’s government and the presumed ascendancy of Boris Johnson to Number 10 next week, his promise to take the UK out of the European Union on October 31^st with or without an exit deal has become the overriding economic factor.  

The winner of the Conservative Party vote for leadership between Mr. Johnson and Jeremy Hunt will be announced on July 23 .

The Bank of England and many others have warned of the economic and financial calamity of an uncharted exit from the EU.  The potential for a recession in the UK and the continent is high and the central bank policy response will be the main market focus.

The sterling dropped to a 27-month low against the dollar on Tuesday. The euro has been trending down for two weeks and is vulnerability in that an abrupt British exit is not fully priced into the currency markets.  

Conclusion

Bank of England rate policy is about to become a one-note economic analysis dominated by the reactive planning for no-deal exit. 

It is not that economic statistics no longer matter but that for the next three and a half months they will be nothing more than ripples on the storm waves sweeping up the Channel.