Posts here from summer 2013 suggested that the trend in UK consumer price inflation would shift from down to up in spring 2014 in lagged response to faster monetary growth and associated economic strength. This forecast has proved wrong because of unexpected significant declines in global energy and food commodity prices and sterling strength. “Deep core” inflation, however, has probably firmed since early 2014.

Annual CPI inflation was 1.3% in October, up from 1.2% in September but down from 1.7% in the first quarter of 2014. A commonly-used measure of “core” inflation strips out energy, food, alcohol and tobacco. This has fallen by much less – from 1.6% in the first quarter to 1.5% in October.

This core measure, moreover, incorporates the drag on inflation from a 14.5% rise in the effective exchange rate between March 2013 and July 2014. According to simulations on the Bank of England’s COMPASS model reported by MPC member Kristin Forbes in a speech in October, this rise was expected to cut CPI inflation by about 1 percentage point by end-2014, up from about 0.4 percentage points in the first quarter. This estimate relates to the headline rate rather than core inflation. Nevertheless, it is reasonable to suggest that the core measure would have firmed from about 2% in early 2014 towards 2.5% now in the absence of sterling’s rise.

An alternative approach to gauging underlying pressure is to focus on services inflation, which is less affected by the exchange rate and commodity price changes, although not completely insensitive. CPI services inflation was 2.5% in October versus 2.4% in the first quarter. Services producer price inflation, meanwhile, rose from 0.8% in the first quarter to 1.6% in the second*.

Recent stronger average earnings growth is consistent with a rising core trend. Doves argue that higher wage growth will be matched by faster productivity expansion, resulting in little change in unit wage costs. Historically, however, prices have exhibited a stronger correlation with earnings than unit wages. This may be because rising earnings growth is usually accompanied by a widening of margins, which offsets the inflation benefit of improved productivity.

Recent further commodity price falls and the lagged impact of prior exchange rate strength will continue to obscure the trend in core inflation until well into 2015. The MPC should be directing attention to core risks and keeping the door open to an early Bank rate rise, thereby acting symmetrically with its approach during the 2010-12 inflation overshoot.

*Third quarter released on 26 November.