UK Inflation Preview: Oil prices set to drive UK headline inflation lower

Mario Blascak, PhD Independent Analyst

The UK headline inflation is expected to have decelerated to 2.1% over the year in December as oil prices dropped during the final quarter of 2018.
The core UK inflation is expected to remain stable at 1.8% y/y as Brexit-related uncertainty drop in Sterling compensates with higher import prices.

The headline UK inflation is expected to have decelerated to 2.1% y/y in November, down from 2.3% y/y in the previous month while core inflation stripping the consumer basket off food and energy prices is seen stable at 1.8% y/y, the Office for National Statistics is expected to report on Wednesday, January 16 at 8:30 GMT.

The headline UK inflation is expected to decelerate due to the oil price drop in the final quarter of 2018, that saw crude falling some 38% from the beginning of October until the end of the year. Compared to a year ago, the end of December crude oil was trading some 15% lower in December of 2018 as market discounted the oil overproduction, the rise of the oil reserves and slowing global economic demand.

The drop in the oil prices is expected to have little effect on core UK inflation that excludes food and energy prices from the consumer basket as the Brexit-related uncertainty weighed on Sterling at the end of the year pressing on import prices to rise.

The day after the crucial Brexit deal vote is expected to be rejected by the House of Commons with the margin of votes above 100 likely to see Sterling falling with the upward inflation pressures arising from the move, depending on the extent of the depreciation.

In terms of monetary policy, the Bank of England is scheduled to meet on Thursday, February 7 releasing fresh Inflation Report with Brexit deal implications reflected in the fresh macroeconomic forecast. The Bank of England policymakers will be looking at the UK wages as a fundamentally more important driver of UK inflation than the swing of Sterling on the currency markets.

Regarding the UK real wages, the deceleration in the UK inflation is a positive macroeconomic development, with three months to October regular and total pay rising 3.3% over the year the real, inflation-adjusted wages rose 1.0% and 1.1% over the year.

UK inflation indices, November 2008-November 2018

Source: Office for National Statistics

Author

Mario Blascak, PhD

Independent Analyst

Dr. Mário Bla&scaron;čák worked in professional finance and banking for 15 years before moving to journalism. While working for Austrian and German banks, he specialized in covering markets and macroeconomics.

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