UK inflation in line with expectations but careful with doldrums risk

Swissquote Bank Research Team Swissquote Bank Ltd

UK January Consumer Price Index Y/Y ended at 3.0%, in line with expectations and confirming the view of the Bank of England to tighten monetary policy sooner than expected (probably in May 2018), largest contributors to this increase (CPIH Y/Y data) being Housing & Household Services (+0.52%), Transportation (+0.43%) and Recreation & Culture (+0.41%). Recent data are bad news for UK consumers, as wage growth remains weak, valued at 2.20 as of September 2017 in nominal value according to the Office for National Statistics and currently estimated at 2.50%. GBP/USD decrease since Brexit referendum (-3.60% since June 2016; +2.94% Year to date) also contributed to inflation increase, outbidding costs of imported goods and services. Despite this inflationary scenario, the BoE remains optimistic and maintains its prevision of an inflation rate at 2.40% for 2018, expecting an inflation slowdown for 2018 due to recent commodity prices pullback (Bloomberg Commodity Index down by 4.47% since the end of January).

No clear reactions were noticed following the announcement. The FTSE 100 and FTSE 250 closed at 7’168 (-0.16%) and 19’320 (-0.31%) points while GBP/USD and GBP/EUR pairs were maintained at 1.3894 and 1.1246.

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We expect Brexit negotiations to be the main factor as to determine whether the BoE will be able to maintain price stability for the coming year, as a weaker GBP would cause further harm to UK purchasing power (UK consumer spending gives first signs of weakness according to a recent payment processing company published data on UK payment processing). In any case a sudden rate hike would cause further harm by exposing households holding consumer credits or real-estate loan to higher interest rates, coupled with strong inflation.

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Swissquote Bank Research Team

Swissquote Bank Ltd

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