UK CPI Preview: Inflation set to pick up further

The Bank of England has raised the Bank rate already at the beginning of November, so the monetary policy action is over. Especially with the Bank’s ultra-dovish outlook for rates to be raised two more times within next three years.

The consumer price index is set to rise 3.1% over the year in October, the Office for National Statistics is expected to show on Thursday at 9:30 GMT.

The Bank of England reasoned its lift-off in the Bank rate from all-time low because of inflation, so the current development is just about to confirm its stance. With higher inflation, real wages are negative, cutting the prospects of the economic growth so October’s headline number is not going to be any game changer.

Actually, with the inflation rate more than one percent above the target, the Bank of England Governor Mark Carney will have to write an explanatory letter to the Chancellor of the Exchequer Philip Hammond. 

While the ongoing pass through from previous Sterling’s depreciation is to blame for the UK inflation to move to current peak, petrol prices in October fell as much as 0.8% m/m, offsetting the inflationary discomfort. 

With Sterling’s past depreciation effect dissipating in months to come, the UK inflation is expected to decelerate as well and the dole driver of inflation will be the domestic price pressures.

From the monetary policy view, the inflation is looked upon with other indicators like wage growth and retail sales in order for policymakers to see the whole picture of how the inflation still over to the economic growth story. Although labor market in the UK is tight, there are no signs of domestic inflation building up, as wage growth remains negative in real terms and Brexit uncertainty weighs on investment and outlook for companies. With no Brexit-related depreciation of Sterling inflation in the UK would have likely been well below inflation target leaving the Bank of England ice-cold.