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UK CPI prints upbeat flashes, following the pause in March; CPI inflation resumed its uptrend in April, picking up to 2.7% YoY, which is way beyond consensus at 2.6% YoY. The CPI ‘core’ rate (excluding energy, food, alcohol, and tobacco) accelerate to 2.4% YoY in April from 1.8% YoY in March, the rise a little larger than expected. RPI inflation also accelerated; rising from 3.1% YoY to 3.5% YoY in April, with both this and the RPI index at 270.6 - a touch above consensus expectations.
The rise in April CPI provided further evidence of the continued impact of last year’s sterling depreciation last year, with much of the contribution provided by those components of the CPI that are more sensitive to movements in the exchange rate. Relative to last year, clothing, and footwear prices rose 1.1%MoM (-0.3% MoM in April 2016) and furniture prices were down just 1.0%MoM (-1.5% MoM in April 2016) – both providing positive contributions to the annual rate.
Well, inflation developments in the UK are increasingly attracting attention after the Bank of England underlined the negative effect of rising prices on real incomes at its meeting last week.
As falling real incomes will put pressure on domestic demand over the coming months a renewed rise of the inflation rate today should not be interpreted as a strongly GBP positive sign.
The BoE will not raise interest rates quickly to get inflation to return back to target if this puts undue pressure on the economy that is already cooling as a result of Brexit.
It had signaled last week that rate hikes might be quicker than currently expected, but this had not referred to the rise in inflation fuelled by GBP depreciation but had been linked to the condition that Brexit will be implemented in a rather smooth way.
And whether that really turns out to be a realistic assumption will only become clear over the course of next year at the earliest once the Brexit negotiations have progressed sufficiently. As we consider the BoE’s economic outlook presented last week to be remarkably upbeat we do not consider any GBP gains made in the meantime to be sustainable.
