UK CPI inflation likely to average 0.1% this year

Given the August consumer and producer price data came in largely in line with the forecast and consistent with the view that underlying inflation pressures remain fairly muted across the price chain, the inflation profile is projected. 

"UK CPI inflation is expected to average 0.1% this year, while now it is expected to be 1.4% next year, a touch below the previous forecast of +1.5%, mainly reflecting a slightly lower oil prices assumption", says Barclays.

In the very near term, CPI inflation is likely to re-enter negative territory (in September and October), before slowly returning to positive territory around the end of the year, supported by energy base effects. 

"Instead, core prices are expected to hover around 1.1% until year-end. According to the latest profile, headline CPI inflation is likely to reach 1.8% towards the end of 2016", forecasts Barclays.

Risks to the projected CPI inflation profile are broadly balanced. While volatile components could surprise to the downside relative, core inflation may come in stronger than expected as services inflation could accelerate, supported by improved domestic demand conditions, including stronger wage growth.

This forecast highlights the challenge for the BoE to engineer a rate hike, assuming growing underlying domestic pressures but facing stubbornly low headline inflation. While this likely calls for no rate hike, the BoE continues to forecast a stronger recovery in inflation and even an overshoot of its target in the course of 2017. 

Wage growth indicators should be continuosly monitored for signs of mounting domestic pressures, particularly at the turn of the year, as nominal wages will have to pick up more than inflation to maintain momentum in real income.

"The uptick in RPI is expected to prove temporary, as it was caused primarily by differences in the way road fuel costs are treated in the two indices. Therefore, the RPI print is expected to be soft in September", added Barclays.