UK consumer price inflation at 2.9% yet little prospect of BoE action - ING

UK inflation continues to push higher, but political and economic uncertainty mean the Bank of England is likely to tread carefully, according to James Knightley, Senior Economist at ING.

Key Quotes

“UK Consumer price inflation has come in at 2.9%, well ahead of the 2.7% consensus. We had feared a higher than consensus figure on the basis that utility bill hikes were set to feed through in a major way and that does appear to have had an influence. There was also a big swing upwards in clothing prices, which may be seasonal effects from Easter lingering in the data. It could also be because of retailers increasingly feeling the effects of sterling currency hedges dropping off, pushing up the cost of imported products. Sterling effects on package holidays also played a part.”

“There was also a large upward contribution from recreation (computer game prices apparently increased significantly) which saw its annual rate of price inflation jump to 2.3%YoY from 1% in April. The only major drag was from transportation costs, which related to a sizeable decline in motor fuel costs. However, petrol pump prices are edging higher once again in June so this may only be temporary relief.”

“Tomorrow’s labour report is likely to show wage growth dipping slightly to 2%YoY so the squeeze on spending power is intensifying. Already, there are worrying signs for consumer spending with this week’s retail sales report likely to post a heavy decline given readings from the likes of the British Retail Consortium and Visa, the payment card company.”

“Given the lack of positive newsflow on the domestic economy and the political uncertainty the UK faces it is not surprising that financial markets are pricing in a less than 10% chance on an interest rate rise this year, with the probability of a rate rise by the end of 2018 put at just 33%. Given the lack of domestic price pressures (as highlighted by subdued wage growth) we don’t expect an interest rate hike before the official deadline for Brexit talks to conclude in 2019.”