16 Jun 2015
UK CPI to pick up sharply in H2 2015 – Danske
FXStreet (Barcelona) - Analyst at Danske Bank, Mikael Olai Milhøj, sees the low UK inflation as temporary and expects the CPI to pick up sharply in the second half of this year, and further maintains the November BoE rate hike call.
Key Quotes
“As expected, deflation in the UK proved temporary, with inflation increasing to 0.1% y/y in May from -0.1% y/y in April (Danske Bank: 0.1% y/y, consensus 0.1% y/y). Core inflation increased to 0.9% y/y in May from 0.8% y/y in March.”
“Inflation remained very low despite the increase in May, due mainly to the falls in energy, food and non-industrial good prices due to the strong sterling lowering import prices. Services inflation, which to a large extent is generated domestically, remained above the Bank of England’s 2% target; this was still low in a historical context.”
“We still expect CPI to pick up sharply in H2 when the base effects of the declines in energy and food prices begin to drop out. We expect inflation to reach around 1% at the end of this year and around 1.7% at the end of 2016.”
“In other words, the very low inflation is likely to be only temporary. This should have the advantage of boosting consumption, and hence the UK’s recovery, as UK citizens experience positive real wage growth for the first time since 2009.”
“We still expect the MPC to hike rates in November this year as the medium-term inflation outlook still calls for tighter monetary policy, in our view. The low core inflation, strong sterling and fiscal consolidation present downside risks to our call, as they imply that the MPC may be more patient with the bank’s first rate hike.”
Key Quotes
“As expected, deflation in the UK proved temporary, with inflation increasing to 0.1% y/y in May from -0.1% y/y in April (Danske Bank: 0.1% y/y, consensus 0.1% y/y). Core inflation increased to 0.9% y/y in May from 0.8% y/y in March.”
“Inflation remained very low despite the increase in May, due mainly to the falls in energy, food and non-industrial good prices due to the strong sterling lowering import prices. Services inflation, which to a large extent is generated domestically, remained above the Bank of England’s 2% target; this was still low in a historical context.”
“We still expect CPI to pick up sharply in H2 when the base effects of the declines in energy and food prices begin to drop out. We expect inflation to reach around 1% at the end of this year and around 1.7% at the end of 2016.”
“In other words, the very low inflation is likely to be only temporary. This should have the advantage of boosting consumption, and hence the UK’s recovery, as UK citizens experience positive real wage growth for the first time since 2009.”
“We still expect the MPC to hike rates in November this year as the medium-term inflation outlook still calls for tighter monetary policy, in our view. The low core inflation, strong sterling and fiscal consolidation present downside risks to our call, as they imply that the MPC may be more patient with the bank’s first rate hike.”