UK inflation Preview: Inflation set to pick up as fuel prices feed through

• The UK headline inflation is expected to have accelerated to 2.5% over the year in May while core inflation is expected to remain unchanged at 2.1% y/y.
• With post-Brexit Sterling’s depreciation being fully priced-in the UK inflation, the period of Sterling’s appreciation from March 2017 till April 2018 is not yet taking its toll while fuel prices are more likely to affect rising inflation.

The UK inflation is expected to pick up to 2.5% y/y in May after decelerating to 2.4% over the year in April, the Office for National Statistics is set to report on Wednesday at 8:30 GMT.

The UK inflation rose as high as 3.1% over the year last year in November, the highest level since March 2012 as the post-Brexit Sterling’s depreciation resulted in import prices rising rapidly and pushing the inflation in the UK higher. After peaking in November last year, the UK inflation was falling relatively steeply with inflation in April falling to the lowest level since January 2017. 

Quickly decelerating inflation in tandem with the GDP growth unexpectedly strongly in the first quarter this year were also the main reasons for the Bank of England to remain growth-supportive sending an ultra-dovish message on the expected path of rate increases back in May macroeconomic projection contained in its Inflation Report. 

The conservative outlook for inflation in the UK dwelling off 2% inflation target of the Bank of England was also confirmed by the inflation expectations survey published by the Bank last Friday. The Bank of England inflation expectation survey saw median inflation expected in the one-year horizon at 2.9% in May, unchanged from April.  

While rising inflation is the good news for Sterling because it increases the likelihood of the Bank of England rate hikes, the inflation data from May are set to be the exception, as the headline inflation is almost purely be driven higher by the fuel costs with core inflation stripped for food and energy prices remaining stable.

The core UK inflation is expected to remain steady at 2.1% confirming that the prices are getting back on the targeted trajectory. 

The UK inflation