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UK data arguing for early rate rise

Posted on Tuesday, September 12, 2017 at 02:34PM by Registered CommenterSimon Ward | CommentsPost a Comment

UK consumer price inflation rebounded to 2.9% (2.86% before rounding) in August and is on course to exceed the August Inflation Report projections of 2.68% and 2.75% for the third and fourth quarters respectively. With activity data and surveys indicating that GDP growth is holding up in the third quarter, and the labour market tightening further, the case for reversing the August 2016 Bank rate cut has strengthened.

A post in July argued that a pull-back in CPI inflation from 2.9% in May to 2.6% in June represented temporary relief and that both headline and core rates would reach higher levels later in 2017. While August headline inflation was on a par with May, the core rate – i.e. excluding energy, food, alcohol and tobacco – moved up to 2.7% (2.66% before rounding). Core inflation is the highest since 2011, or 2009 excluding the impact of VAT changes.

The August increase partly reflected a sharp rise in annual clothing inflation, which may partially reverse in September – prices rose relatively strongly in September 2016. The contribution of electricity and gas prices, however, will increase, with British Gas raising its standard electricity tariff by 12.5% on 15 September. A surprise fall in food inflation, meanwhile, may be reversed: CPI food inflation of 2.3% in August is unusually low relative to producer output price inflation for food products of 5.9%. A rise in the maximum undergraduate tuition fee to £9,250 may exert a small upward influence from October.

The expectation here is that headline inflation will average 2.9% over the remainder of 2017, with a 3.0% reading likely in at least one month.

Output and turnover data released last week suggest that July GDP was 0.3% above the second quarter level, i.e. third-quarter growth is on track to match or exceed the 0.3% projection in the August Inflation Report. The single-month unemployment rate fell to 4.2% in June, below the Report's 4.4% forecast for the second half. Staff placements are rising strongly while candidate availability has declined further and starting salaries for permanent jobs are increasing at their fastest rate since 2015, according to the latest Recruitment and Employment Confederation survey.

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