UK Inflation expected to remain steady at 3.0%

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Consumer price index data for the month of December will be the major data point coming out of the UK next week. However, consumer prices in the United Kingdom are expected to remain elevated above 3.0% for possibly the fourth consecutive month. Due to this UK Inflation expected to remain steady.

Data from the UK’s Office for national statistics is expected to show that consumer prices might have increased 3.0% in the month ending December on an annual basis. The forecasts show a slightly slower pace of inflation growth during the month, compared to November’s increase of 3.1%.

Consumer prices rose to the highest level in November at 3.1% marking a 6-year high. The gains came mostly from airfares and computer gains. In contrast, average weekly wages in the UK were  rising at only 2.2% on annualized terms. The sharp increase in inflation has continued to put household spending under pressure.

In November, the Bank of England made the decision to hike interest rates for the first time in nearly a decade. The BoE’s interest rates rose from 0.25% to 0.50%. Officials at the BoE however, did not give out more details on when the next rate hike could come. The markets appear to be of the opinion that the BoE could hike rates again in August this year.

Following the November’s rate hike decision, the slower pace of inflation increase for December could be a welcome change.

Still, the BoE is not out of the woods as inflation remains stubbornly above the central bank’s 2.0% inflation target rate. BoE’s Carney is expected to write a letter to the Chancellor of the Exchequer explaining the strong rise in inflation. The previous letter that Carney wrote was in December 2016 when consumer prices fell to the weakest level of 0.9%.

The BoE is of the view that inflation will peak by October or November. If today’s inflation report comes out as expected or even weaker, then there is a possibility that the BoE is on track with it’s forecasts.

At the expected 3.0% increase for December, it is likely that UK’s consumer prices have peaked already. Thus, the coming months could see UK’s inflation cooling. It is unlikely however, that consumer prices could fall back 2.0% anytime soon. By some estimates, consumer prices are expected to fall to 2.5% by the start of the second quarter this year.

In a recent survey report released by the Royal Society of Arts, respondents cited concerns over job security and falling pay alongside higher costs. UK workers are concerned about inflation continuing to outpace wages. Shrinking wages are expected to impact the spending and thus the economy overall.

The RSA conducted the survey among 2000 participants and the resulted showed that over two-thirds of the respondents were concerned with higher housing costs.

Despite the higher inflation, the UK’s economy has managed to remain resilient. The economy is forecast to rise on average at a pace of 0.4% on the quarter. This comes despite the wage squeeze and Brexit uncertainty which has kept business investment subdued.

The British pound closed last week at 1.3782, marking a two year high. Most of the gains however came as a result of a weaker U.S. dollar. Manufacturing, construction and industrial output data that was released last week showed that the three sectors continued to expand, albeit at a mixed pace.




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