UK inflation fails to rise and market forecasts are likely to be cut

The second consecutive miss versus consensus will prompt reappraisals for this year and next.

15/08/2017
Financial-district-of-London

Authors

Azad Zangana
Senior European Economist and Strategist

UK annual inflation has remained unchanged at 2.6% in July, as measured by the consumer price index (CPI). More significantly, this is the second consecutive downside surprise versus consensus expectations.

The majority of forecasters had expected an increase to 2.7%, but the latest miss will lead to many downgrading their inflation estimates for the rest of this year and next.

Returning to the details of the inflation report, core inflation, which excludes energy, food, alcoholic drinks and tobacco, remained unchanged at 2.4% against expectations of a rise to 2.5%. Meanwhile, inflation measured by the retail price index rose from 3.5% to 3.6%, driven by faster house price inflation, and highlighting the inappropriateness of this index.

Although transport prices remain the biggest contributor to the CPI index’s year-on-year figures, the sub-index was the biggest downward contributor on the month. However, this was offset by positive contributions from food prices in general, clothing and footwear, housing and household services and furniture and households goods.

Impact of weaker sterling is waning

Separately, the Office for National Statistics also published the latest producer prices index (PPI), showing both input and output inflation was lower than expected. This is an important report at the moment as it is helping economists track the impact of the depreciation in sterling on companies, which eventually impacts the consumer.

The latest figures show both input and output PPI inflation slowing – suggesting that we could be past the peak of the impact from the currency devaluation. Taken together with the latest CPI data, it appears that the impact from sterling is passing through faster than previously expected, which should mean lower inflation especially in 2018.

No change to our forecasts

This is consistent with the Schroders forecast, which is towards the bottom of consensus estimates for next year, and monetary policy remaining lower for longer. It would now seem to be almost impossible for the Bank of England to raise interest rates while inflation is close to its peak, and UK growth the weakest in the G7.

Important information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.

Authors

Azad Zangana
Senior European Economist and Strategist

Topics

Follow us

Schroder International Selection Fund is referred to as Schroder ISF throughout this website.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Investment Management (Europe) S.A. is subject to the UCITS law of 17 December 2010 and the AIFM law of 12 July 2013.