UK inflation Preview: Real wages set to increase further as inflation is seen decelerating

• The UK consumer price index (CPI) is expected to accelerate to 2.8% y/y in September.
• Core inflation stripped off food and energy items is expected to decelerate to 1.8% y/y. 
• Real wages are set to increase as wages continue to rise faster than prices.

The UK headline inflation is expected to have accelerated to 2.5% y/y in September, from 2.4% y/y in August while core inflation stripping the consumer basket off food and energy prices is seen decelerating to 1.8% y/y from 2.1% in August, the Office for National Statistics is expected to report on Wednesday, October 17 at 8:30 GMT.

Development of the headline inflation is likely to reflect the lower extent of the energy prices in September this year compared with the base period of September last year and the seasonal factors. While food prices affected headline inflation the most in September last year, in August this year it was the recreation prices that drove inflation higher and those are likely to fall off the scope in September. 

In terms of real wage development, even with headline inflation accelerating to 2.5%, the nominal rise in regular pay is up 3.1% y/y meaning that the real wage is up 0.6%.

With the Brexit summit kicking off later on Wednesday, October 17, the FX market is likely to factor the Brexit news more than the economic fundamental. The GBP bulls benefit from the positive Brexit news with German European Union Minister Michael Roth saying on Tuesday that the “we will get the Brexit deal but we must protect EU interests”. 

While inflation ticked up to 2.5% in back in July this year helping the Bank of England to justify its August decision to hike interest rates, the outlook for further monetary policy remained dovish as central bank already said further rate hikes will only be limited and gradual.

The Bank of England expects inflation to moderate in coming months, as the previous effect of Sterling´s depreciation is fading away and domestic price pressures are taking over with the UK labor market tightness being the primary factor. The bank of England chief economist Andrew Haldane confirmed the stance last week saying market expectations of 25 basis points a year increase in policy rates are "not dissimilar" to the Bank’s own forecasts for pick up in wage growth over the next 3 years. 

The UK labor market report in September confirmed the expectations with the regular pay excluding bonuses rising 3.1% over the year in three months to August period, the fastest pay rise in a decade. 

Contribution to UK inflation in August 2018