Today’s news of a further rise in UK consumer price inflation to 3.0% in September supports the case for the MPC to raise interest rates in November but does not provide additional hawkish information relative to the August release.
CPI inflation averaged 2.82% for the third quarter as a whole versus a projection of 2.68% in the August Inflation Report. The MPC then expected a further rise to 2.75% in the fourth quarter; current trends suggest an average of 3.0%.
CPI inflation just made it to 3.0% in September: the unrounded figure was 2.96%.
The rise from August was driven by food inflation, which jumped from 2.3% to 3.4%. A post last month noted that CPI food inflation was unusually low relative to producer output price inflation of food products, which reached 6.0% in July and remained elevated at 5.5% last month. A further rise in CPI food inflation, therefore, appears likely.
The September data collection date preceded a 12.5% increase in the British Gas standard electricity tariff on 15 September – this will lift annual inflation by a further 5-10 basis points in the fourth quarter.
Core prices are still rising at an above-target pace. The core measure monitored here excludes energy, food, alcohol, tobacco and education, and adjusts for historical VAT changes. Seasonally adjusted, core prices rose by 0.2% between August and September and at a 2.6% annualised rate in the latest three months – see chart.
As previously discussed, the claim that the inflation overshoot is entirely attributable to sterling weakness has become more difficult to sustain following data revisions showing unit labour cost growth of 2.4% in the year to the second quarter.
The view here remains that the rising inflation trend stems from a significant pick-up in money growth from 2011, with this faster expansion subsequently contributing to the fall in the exchange rate – see previous post. Annual broad money growth appears to have reached a peak in late 2016 but has usually led inflation turning points by at least two years historically, suggesting that upward pressure will persist in 2018.
