UK: Inflation picks up, little signs of imports cost pressures - Lloyds  Bank

Analysts from Lloyds Bank explained that inflation in the United Kingdom picket up during June and going forward they see the effects of a weaker sterling offset by a “somewhat more subdued recent oil price dynamics, and further out, by diminished capacity pressures in the economy”.

Key Quotes:

“UK CPI inflation picked up in June to an annual rate of 0.5% from 0.3% y/y in May, above our and consensus expectations of a more modest rise to 0.4% y/y. The CPI ‘core’ rate (excluding energy, food, alcohol and tobacco) firmed to 1.4% y/y from 1.2% y/y in May, also above expectations of a more muted gain.”

“The recent depreciation of sterling, even in advance of the EU referendum result, is likely to push up on the sterling price of energy further. A more important driver in June was the 10.9% surge in airfares, the largest May to June move on record, attributed to price increases around the European football championships.”

“With sterling around 9% weaker than in advance of the referendum result, and further weakness still possible despite the recent signs of stabilisation, the pickup in UK inflation is going to be sharper than on our previous forecasts.”

“We envisage an overshoot of the 2% target for CPI from 2017 Q4. For now, the scale of this overshoot still appears modest, as the upward push from weaker sterling is partly offset by somewhat more subdued recent oil price dynamics, and further out, by diminished capacity pressures in the economy as momentum eases off – even if, as the Bank of England has indicated in July’s MPC minutes, monetary policy is likely to be eased at the upcoming meetings in response.”