UK inflation Preview: Slowdown in inflation is seen temporary and BoE is set to look at wages

• The UK headline inflation is expected to have decelerated to 2.3% y/y in November while core inflation slow to 1.8% y/y.
• The oil prices fell 22% in November weighing on headline inflation to decelerate.
• With UK wages rising 3.3% over the year in nominal terms, the real, inflation-adjusted wages are set to accelerate slightly supporting the outlook for consumer spending.

The headline inflation is expected to have decelerated to 2.3% y/y in November, down from 2.4% in the previous month while core inflation stripping the consumer basket off food and energy prices is seen decelerating to 1.8% y/y from 1.9% in October, the Office for National Statistics is expected to report on Wednesday, December 19 at 8:30 GMT.

The deceleration of the UK inflation marks the positive macroeconomic development in the UK of late with three months to October regular pay excluding bonuses rising  3.3% y/y and total pay (including bonuses) rising also 3.3% in three months ending in October. That should see the real, inflation-adjusted wages rise more than 1.0% and 1.1% y/y increase reported.

With Brexit uncertainty peaking in recent weeks, the Bank of England is unlikely to act in terms of monetary policy as it is scheduled to meet on Thursday, December 20. The Bank of England policymakers are likely to see the inflation slowdown as a temporary factor given the dynamic wage growth that is more likely to draw their attention anyway.

The outlook for inflation is generally positive for the Bank of England as in approached the 2% inflation target sooner than expected with the help of oil prices falling 22% in November. On the other ongoing Brexit uncertainty resulting in Sterling´s depreciation is set to revive domestic price pressures together with the UK labor market tightness that presses on rising wages to generate higher demand pushed inflation.  

In order to protect the margins, companies in the UK are likely to pass higher costs onto customers increasing their selling prices, the effect related to a weaker Pound and higher import prices stemming from the recent wave of Sterling´s depreciation from 2018 high of 1.4377 to 1.2477 low at the beginning of December.