James Smith, developed markets economist at ING, suggests that the fact that UK core inflation has now been below the Bank of England’s 2% target since last September appears to offer little reason to tighten policy further.
“There are a few key reasons why we suspect policymakers will remain a little more hawkish on the outlook for inflation over the coming months.
Firstly, the latest dip in core CPI to 1.7% in May was largely down to airfares - a volatile component of the inflation basket, which fell back after Easter by around 5%.
Secondly, and more broadly, the modest downtrend in core inflation over recent months also reflects the lagged impact of sterling’s post-Brexit plunge filtering out of the numbers.”
“Even so, it’s fair to say that underlying consumer inflation has still been fairly unexciting.”
“Most importantly though, policymakers continue to put greater emphasis on wage growth, which is still performing fairly solidly. The BoE expects wage pressures to continue building as skill shortages bite.”
“In other words, we expect the Bank to stick to its reasonably hawkish mantra at tomorrow’s meeting.”
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