UK in­fla­tion: core is not yet more

The Pak Banker - - OPINION - Ross Fin­ley

The sur­prise rise in Bri­tish in­fla­tion from zero to 0.1 per­cent and core in­fla­tion by 0.4 per­cent­age point to 1.2 per­cent in July sup­ports the view rates soon must go up - and also it doesn't. Depend­ing on who you read, un­der­ly­ing price pres­sures are pick­ing up in the econ­omy and will give pol­i­cy­mak­ers added con­fi­dence they will need to tighten pol­icy; or the data are mainly down to a sea­sonal tim­ing is­sue over dis­count­ing of cloth­ing and footwear; or on the whole the num­bers still sug­gest wide­spread dis­in­fla­tion pres­sures in the econ­omy and so tell us lit­tle about the tim­ing of the first rate hike.

Daniel Ver­azza, UK Economist, UniCredit: Core in­fla­tion now lies above its 1999-2007 av­er­age of 1.1% when the Bank Rate av­er­aged 4.8%. In the last few months MPC mem­bers have at­tached par­tic­u­lar im­por­tance to mea­sures of core in­fla­tion as they look-through the tem­po­rary im­pact of the fall in energy and food prices. In­deed, in July (Bank of Eng­land Gover­nor Mark) Car­ney listed a rise in core in­fla­tion as one of three pre-con­di­tions for rate hikes.

Ge­orge Buck­ley, UK Economist, Deutsche Bank: With core out­put prices also up in July these num­bers won't be missed by the BoE; the out­look for do­mes­ti­cally gen­er­ated price in­fla­tion will be key to when the first rate hike is de­liv­ered.

Alan Clarke, head of Euro­pean Fixed In­come Strat­egy, Sco­tia­bank: The BoE are fo­cus­ing more heav­ily on do­mes­ti­cally gen­er­ated in­fla­tion and core in­fla­tion - and there are two clear signs of up­ward pres­sure here - cloth­ing and air­fares. The lat­ter is strik­ing be­cause oil is 50% cheaper than a year ago yet air­fares are up. We need another month or two to con­firm that this was not a one off, but so far so good.

Allan Monks, Economist, J.P. Mor­gan: One tenth of the rise in core came from trans­port ser­vices and around two tenths came from a spike in cloth­ing and footwear in­fla­tion. Both of these com­po­nents can be volatile (es­pe­cially for cloth­ing dur­ing the sum­mer months, where we had an­tic­i­pated some re­bound in July). This war­rants some cau­tion when in­ter­pret­ing the move up in core in­fla­tion. Even if these moves are not un­wound in Au­gust, the July gains may be a false sig­nal about where the mo­men­tum in core in­fla- tion is cur­rently.

For now we are in­clined to view the July in­fla­tion sur­prise as re­flect­ing more noise than sig­nal, hence we down­play its sig­nif­i­cance for pol­icy. But there is prob­a­bly some truth in both in­ter­pre­ta­tions. The core in­fla­tion data is a key vari­able to watch over the com­ing months re­gard­ing MPC vot­ing be­hav- ior…We think the July data are un­likely to prompt any change in vot­ing in­ten­tions. But if core in­fla­tion sus­tains its move up and runs com­fort­ably above 1% in the com­ing months, this could prompt more dis­sents be­fore the end of the year.

In the very near term, head­line in­fla­tion is likely to fall in the next re­lease and could turn neg­a­tive again in 3Q - ow­ing to a com­bina- tion of fall­ing oil prices, a stronger cur­rency and food prices which showed a sur­prise de­cline in July (not all of which will have been cap­tured in the BoE's Au­gust in­fla­tion re­port fore­casts). So although July in­fla­tion has come in higher than the BoE ex­pected (0.0%oya) due to core in­fla­tion sur­pris­ing on the up­side, greater drags from food and energy in the com­ing months could see head­line in­fla­tion in 3Q un­der­shoot the BoE's forecast.

Econ­o­mists at Bar­clays: The ac­cel­er­a­tion in core in­fla­tion will likely at­tract most at­ten­tion within the re­lease. We see risks that this may re­verse in Au­gust, as cloth­ing prices re­bounded sharply in that month in 2014 and are un­likely to have re­bounded as strongly this year. Like­wise, air fares fea­ture in the UK core ag­gre­gate and are volatile. Within core in­fla­tion, we see Recre­ation and Cul­ture as worth watch­ing as a bell­wether of UK con­sumer con­fi­dence. We do not think that the July in­fla­tion data will sig­nif­i­cantly shift the MPC nar­ra­tive in the near term.

Philip Shaw, Chief Economist, Investec: We would ar­gue that to­day's fig­ures tell us lit­tle about the tim­ing of the first in­crease in in­ter­est rates, which will de­pend on big­ger pic­ture news on do­mes­tic growth, pay trends and per­ceived down­side risks in the global econ­omy.

Me­lanie Baker, Economist, Mor­gan Stan­ley: The out­come was a touch above con­sen­sus ex­pec­ta­tions, though in line with our own. Most of the rise was at­trib­ut­able to (base ef­fects in) cloth­ing (the com­po­nent partly re­spon­si­ble for last month's fall in in­fla­tion).

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