UK inflation could rise to 3% in the H2 2017 – Natixis

The research team at Natixis expects the UK consumer price index to temporarily rise to 3% in the second half of 2017 as the impact of GBP depreciation slowly feeds into the economy.

Key points

Sterling’s weakness (effective exchange rate down by somewhat more than 14% in late 2016) and base effects of previous falls in energy and food prices will cause inflation to temporary rise to around 3% in the H2 2017.

We expect that the retailers, manufacturers and services providers will search to pass at least a part of their souring costs onto consumers; in particular since the consumer spending has stayed quite resilient in the aftermath of Brexit vote.

Also, we continue expecting the UK economy to slow down this year and anticipate the labour market to lose some momentum, enabling companies to limit pay increases, which should help to contain firms’ total costs in an increasingly challenging environment. Still, the labor costs will rise in 2017 given that firms will: 1/ experience increasing difficulties to hire qualified workers, 2/ hold on to currently employed workers, and 3/ face additional costs from the apprenticeship levy.