MARKET MOVER - BNP PARIBAS - Investment Services India

UK Inflation: No Pressure
• UK inflation ticked up in July, raising concerns
that underlying pressures might be firming. The
subsequent drop in August looks reassuring.
• Headline inflation over the rest of 2012 will
certainly be higher than the Bank of England
forecast in its August Inflation Report. But most of
the difference looks to be down to food and
energy.
• The MPC will look through that, giving it room
to carry out more QE in November.
• RPI inflation has specific methodological risks
attached to it. A consultation has been announced
that could see the average gap between RPI and
CPI narrowed significantly.
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3.0
2.5
2.0
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1.0
0.5
Chart 1: UK Headline and core CPI (% y/y)
CPI (% y/y)
Core (% y/y)
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• The timetable for changes next year is tight.
But the ONS and the government appear keen.
Inflation reared its ugly head in July
Inflation reappeared on the radar of UK policymakers
last month after a surprising rise in the CPI annual rate
to 2.6% from 2.4% in June. That was against market
expectations of a decline in annual inflation in July.
One of the worrying things, potentially, about the rise
in inflation in July was the fairly broad-based nature of
the increase. Clothing prices, for example, showed a
smaller fall than usual for the month and contributed
0.05pp to the annual rate increase. And other notable
increases came from recreation and culture. Within
this category, games, toys and hobbies, newspapers
and periodicals and package holidays were sizeable
upward influences. Away from recreation and culture,
restaurants and hotels, alcohol and tobacco and
housing and household services also made small
upward contributions.
With the UK PMI surveys also surprising to the upside
in August, there was a hint that we might be about to
embark on one of the periodic episodes of inflation
anxiety that result in monetary-policy expectations
being revised in a more hawkish direction. For
example, earlier this year high-side inflation releases
in February and March, along with firmer surveys,
resulted in an extension of QE being taken off the
table at the May MPC meeting.
But it went back in its shell in August, mostly
This week’s August inflation release goes some way
to assuaging concerns about underlying inflation. The
annual rate of CPI inflation fell back to 2.5%, a 0.1pp
Source: ONS, BNP Paribas
reduction. On its own of course that still puts inflation
above the level it was at two months ago.
But additional reassurance can probably be gleaned
from that fact that the fall in inflation was fairly broadly
based. Clothing prices rose less this year than last,
contributing 0.04pp to the fall in annual inflation.
Meanwhile furniture and household goods prices
contributed 0.08pp to the annual change and
housing and household services also made a
downward contribution, as a gas and electricity price
rise in 2011 fell out of the calculation. On the upside,
transport prices added upward pressure to the
annual rate, as did recreation and cultural goods.
Higher inflation largely due to energy and food
This fairly widespread fall-off means the reason that
the headline rate of inflation is higher than in June
largely comes down to higher energy and food
prices. The core rate of inflation actually fell in the
August figures to 2.1%, just a shade above the Bank
of England’s 2.0% target for the headline rate.
There have been several developments of late that
mean the headline rate of inflation will finish this year
significantly higher than expected a few months ago.
Most obviously, the price of a litre of petrol keeps
rising. Indeed, petrol prices are now higher than they
have been since early May, even though the sterling
price of a barrel of crude is lower than it was then.
Other recent upside developments include an
announced rise in gas and electricity bills by one
supplier from October and the expectation that food
prices will firm in due course to reflect higher
David Tinsley 20 September 2012
Market Mover
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