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U.K. headline inflation eases further in October, likely to remain below 2 pct in near term

U.K.’s headline inflation eased further below the central bank’s target rate of 2 percent in October. On a year-on-year basis, the consumer price inflation slowed down to 1.5 percent from prior month’s 1.7 percent. Today’s print was below market expectations of 1.6 percent. However, the core rate of inflation remained steady at 1.7 percent year-on-year, consistent with market expectations. This implies that all of the downside influence came from movements in the ‘non-core’ categories of the inflation basket.

The largest downward influence to October inflation came from lower electricity and gas prices, which dropped 4.4 percent sequentially, as energy companies lowered their prices for standard variable tariffs in response to Ofgem’s energy price cap. In the meantime, a further modest downside contribution came from the fall in motor fuel prices in October, greatly reflecting the effect of the sharp move lower in oil prices towards the end of September. Collectively, these factors accounted for most of the 0.2 percentage points move lower in the headline inflation rate.

Meanwhile, CPIH inflation also eased to 1.5 percent year-on-year from prior month’s 1.7 percent. Nevertheless, relative to the unchanged CPI outturn, the pace of RPI inflation dropped by 0.3 percentage points from 2.4 percent to 2.1 percent. This was mainly because of the housing-related components, which are part of the RPI inflation basket but not included in the CPI.

“Looking ahead, the near-term outlook for UK inflation remains consistent with CPI remaining below 2 percent for most (if not all of 2020), particularly with regulated prices (energy and water) likely to weigh on inflation in the coming year. However, beyond that, the medium-term outlook is still consistent with inflation moving back to (and most likely moving above) target, particularly with disappointing productivity and still-elevated wage growth likely to continue placing increasing pressure on corporate profit margins”, said Lloyds Bank.

By Aditi Awati
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