UK: Inflation likely to move beyond 3% in coming months – Lloyds Bank

UK-specific currency weakness remains the key driver of the inflation outlook while the CPI inflation in May reached 2.9%, the highest since mid-2013 before dropping back to 2.6% in the June report, explains Nikesh Sawjani, Research Analyst at Lloyds Bank.

Key Quotes

“The rise in inflation above its 2% target has been broadly based, with the ‘core’ rate – excluding food, energy, alcohol and tobacco – recently hitting a 4½ year high of 2.6% before dipping back last month.”

“Notwithstanding June’s dip to 2.6%, inflation is expected to resume its ascent over the course of 2017. While non-energy import costs – including food – will henceforth be the dominant driver, the remainder of the hikes in domestic gas and electricity tariffs will also play a part. Weakening underlying cost pressures in the second half of 2017 should provide some offset as growth in the economy slows modestly and reduced labour market tightness limits the eventual overshoot relative to target. Still, compared with the BoE’s May projections – where CPI peaks at 2.8% in 2017 Q4 – our projected overshoot is higher at 3.1%.”