UK: CPI inflation expected to spike higher over the next 12-18 months - RBS

Ross Walker, Research Analyst at RBS, suggests that the UK CPI inflation data for June – the final release before the impact of sterling’s 10% trade-weighted depreciation begins to be felt – are likely to be uneventful.

Key Quotes

“Underlying pricing trends are muted and survey data suggest little scope for upside surprises. Sterling’s slide will spur a sizeable burst of import price inflation – on our estimates the first-round effects of the currency’s 10% fall will be to raise CPI inflation by 1½-1¾% points. Of course, first-round effects will hold little sway over BoE monetary policy.

The pound’s post-referendum slide comes against the backdrop of a recovery already betraying signs of waning momentum and more acute underlying imbalances. We are highly sceptical that the currency-induced inflation shock will prove persistent. Against a backdrop of nominal income growth falling further below trend, firms will struggle to pass on price increases and will resort to squeezing wages in order to offset the energy/import price shock.

CPI inflation is expected to spike higher over the next 12-18 months (around 2.7% on the headline rate, 3.1% on the core) but is likely to be falling fairly rapidly during the policy-relevant 2-3 year forecast range.”