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U.K. headline inflation remains unchanged at 1.7 pct in September, likely to stay below 2 pct in near-term

The U.K. headline inflation remained steady in September, with the consume prince inflation coming in at 1.7 percent, as compared with consensus expectations of a modest rise to 1.8 percent. That the headline inflation failed to move higher last month, in spite of a rise in the ‘core’ rate of CPI, which rose to 1.7 percent year-on-year from 1.5 percent in August, implies that all of the downside surprise was because of weaker than expected prices for food, drinks and energy-related goods and services, said Lloyds Bank in a research report.

Prices in these areas of the inflation basket are seen as being more volatile and therefore movements in these should be treated with caution. However, the headline rate of CPI remained below the key 2 percent mark for a second straight month, providing little justification for policymakers to consider raising interest rates anytime soon.

The biggest upward influence was from furniture, household equipment and maintenance items, where prices rose 1.1 percent sequentially in September compared to a flat reading in September 2018. In the meantime, prices for those areas of the inflation basket covering leisure also contributed positively to the headline figure. Transport and domestic fuels categories weighed in on the headline rate, mostly because of a fall in motor fuel prices and utility prices.

Meanwhile, the CPIH inflation surprised on the downside in September, remaining stable at 1.7 percent year-on-year. Nevertheless, relative to the unchanged CPI outturn, the pace of RPI inflation eased 0.2 percentage points to 2.4 percent from 2.6 percent. This was driven by the “other differences including weight” between RPI and CPI inflation baskets.

The near-term outlook for U.K. inflation continues to be in line with CPI holding continuing to stay below 2 percent, especially as electricity and gas prices have fallen in October, said Lloyds Bank.

“However, beyond that – and based on our assumption of an orderly Brexit ­– the medium-term outlook is still consistent with inflation moving back to (and most likely staying above) target, particularly with disappointing productivity and still-elevated wage growth likely to continue placing increasing pressure on corporate profit margins”, added Lloyds Bank.

By Aditi Awati
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