UK: Inflation ticking higher but limited GBP reaction - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the pound remained broadly stable yesterday and certainly the pronounced fears amongst market participants over pound-induced inflation in the immediate aftermath of Brexit have receded notably.

Key Quotes

“The inflation data yesterday told two stories but the key one for us reinforces the easing of concerns over a damaging inflation induced hit to the economy in 2017.”

“The first story is the obvious one that will become a fact for all major developed economies over the coming months. Energy inflation is starting to tick up and there’s plenty more to come. The energy Inflation component within the UK CPI basket jumped on an annual basis from 1.7% to 3.0% and with a weighting of 6.7% in the basket added close to 0.1ppt of the increase in the overall annual increase from 0.9% to 1.2%. But the moves over the coming months will be much more brutal. Brent crude oil fell notably in Dec 2015 through Feb 2016 and the annual change in crude oil prices could accelerate to about 50%, implying the energy component could jump on an annual basis by as much as 10-15%, adding 0.8ppt to the overall annual rate.”

“But the second story could potentially be more interesting. The core CPI rate also moved higher, from 1.2% to 1.4%. But the core rate stripping out only energy moved by less, from 0.9% to 1.0%. Outside of energy, we have to conclude that the upward pressure on inflation remains very muted. A more modest feed-through from pound devaluation to inflation would be good news for the UK economy and help real incomes in an economy driven by domestic demand and consumer spending. It would certainly be consistent with our more bullish than consensus forecasts for the pound in 2017.”