UK inflation to ease below 3.0% in January – Forex News PreviewPosted on February 12, 2018 at 4:56 pm GMTChristina Parthenidou, XM Investment Research Desk
While the world economy is preparing to welcome higher inflationary pressures under a pro-growth economic landscape, the UK hopes to see inflation falling, easing the pressures on consumers who saw their real incomes narrowing after the Brexit Referendum. On Tuesday, January’s consumer prices (CPI) could bring good news to British consumers as forecasts suggest that inflation will slow down even further. However, the Bank of England (BoE) who eagerly looks for signs to raise interest rates will probably wait to see wages picking up and the Brexit fog clearing up before it makes its next move.
According to analysts, the annual headline CPI due for delivery on Tuesday at 0930 GMT is said to slip to 2.9% in January from 3.0% in the previous month, in line with projections that inflation will gradually return to the BoE’s target of 2.0% as central bankers wish for. The monthly gauge is expected to decline significantly by 0.6% after rising by 0.4%, whereas the core CPI, which excludes food and energy products, is anticipated to inch up by 0.1 percentage points to 2.6% y/y despite seeing a potential pullback of 0.9% on a monthly basis.
On producers’ side, prices are expected to lose steam as well, but only on an annual basis, with PPI weakening by 0.5 percentage points to 4.2% y/y and strengthening by 0.6 points to 0.7% m/m.
Even if Tuesday’s report on prices surprises to the downside, the BoE forecasts that inflation will likely remain around 3.0% in the short-term thanks to sterling’s depreciation which has driven import prices higher. While this asks for further monetary tightening, policymakers will feel more confident to raise rates if wage growth shows further improvement in times when households struggle to meet their debt obligations. Indeed, recent data indicated that a strong labor market has started generating upside pressures on British incomes, with average earnings recovering slowly in the second half of 2017. The unemployment rate dropped to 4.3%, in November, to the lowest level seen in four decades, pushing wage growth up to 2.5% y/y (including bonuses) in the same timeframe. But with earnings lagging behind inflation, households are less willing to spend on goods and services, restricting economic expansion (consumption comprises two-thirds of the UK’s economic growth). All in all, policymakers are optimistic that the labor market will continue evolving in the coming years, generating higher incomes.
In addition, progress on Brexit talks and specifically the reaction of businesses and households to any potential deal could the biggest headwind to the BoE’s plans. Negotiations between the UK and the EU have moved to the second phase where discussions on transition period will take place after both sides struck a deal on citizens’ rights and the Irish border. Yet, this seems to be a hard achievement according to the EU chief negotiator, Michel Barnier, who argued on Friday that there are some disagreements between the sides that could disturb a smoother two-year transition period as the BoE currently assumes. In the scenario of no agreement on this front, UK based companies who wish to keep ties with the single market would reallocate their business operations to avoid any regulatory headaches. Under these circumstances, higher interest rates would be harmful to the British economy.
Sterling/dollar developed a bearish trend last week and has the potential to build on this downleg if inflation measures appear lower than expected on Tuesday. Falling further down, the 50-day moving average of 1.3678 could be the next level in focus, while in the worst case the market could break below the 1.36 key level to meet the 1.3500 handle. On the flip side, stronger prints could see a retest of the 1.4000 psychological level, while steeper increases could also see the 1.4200 key mark.
The next challenge for the market could be January’s retail sales on Friday, which are expected to surge by 2.6% y/y in January compared to 1.4% growth seen in the preceding month, reaching the highest expansion since June.GBPUSD
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