U.K. inflation likely to accelerate further to 1.3 pct in December, says Lloyds Bank

U.K’s inflation outlook is likely to be driven by U.K-specific currency weakness. In November, the nation’s inflation surprised on the upside, greatly reversing the downward surprise seen in October. The headline consumer price index rose at an annual pace of 1.2 percent, whereas the core rate, which excludes energy, food, tobacco and alcohol, strengthened to 1.4 percent year-on-year.

Shifts in the patterns of high street discounting greatly explains the month-to-month wiggles in annual inflation around a broad upward trajectory. But most of the rise in inflation is likely to come in the course of 2017, noted Lloyds Bank in a research report.

Inflation is expected to accelerate higher due to influences from both energy and non-energy import costs, such as food. CPI inflation is expected to accelerate further to 1.3 percent by December and move higher through the 2 percent target by spring 2017, added Lloyds Bank. Moreover, easing underlying cost pressures should provide some offset, thanks to decelerating growth in the economy and the resulting reduction in labor market tightness, restricting inflation’s overshoot compared to target.

“Compared with our previous projections, the overshoot relative to the inflation target is smaller given sterling’s appreciation since mid-October. But, relative to the BoE’s November projections – where CPI reaches 2 percent by 2017 Q2 and peaks at 2.8 percent in 2018 Q1 – our projected overshoot remains a little larger”, stated Lloyds Bank.