UK: Benign inflation backdrop - ING

According to James Smith, developed markets economist at ING, UK inflation has hit the Bank of England’s 2% target for the second month in a row, which offers little reason for policymakers to move interest rates any time soon.

Key Quotes

“As is often the case, energy was more of a drag following a modest fall in petrol prices during June, compared to a 2.2% increase at the same time last year. Once this is stripped out, core inflation inched slightly closer to target (1.8%) following a less pronounced fall in clothing/footwear costs compared to June 2018.”

“Scratching beneath the surface though, we think the Bank of England will remain relatively relaxed about the inflation backdrop. While core inflation has now sat below target for 10 consecutive months, this is predominantly down to the waning impact of the pound’s post-Brexit slide.”

“Stripping the CPI basket down by import intensity – the proportion of a goods/services that are deemed to have been produced abroad – shows that the contribution from items with a 25%-or-greater import share has fallen from around 1.2% at the start of 2018 to 0.5% in the latest figures.”

“However, with the growth outlook continuing to be dominated by Brexit uncertainty, we think it is equally unlikely that policymakers will look to increase rates this year.”