Inflation jump risks 6-3 split for Bank of England rate decision

Gladys Abbott
September 14, 2017

The Office for National Statistics (ONS) have released figures showing that the Consumer Price Index (CPI) measure of inflation was 2.9% in August, outstripping the predictions of 2.8%.

The UK inflation data was stronger than expected with an increase in the year-on-year inflation rate to 2.9% from 2.6% compared with consensus forecasts of a 2.8% rate. Bank of England Governor Mark Carney has said that an "element of Brexit uncertainty" is preventing firms from awarding bigger wage increases, while other explanations include poor productivity and companies clamping down on pay to offset rising import costs, another Brexit fallout.

'Depreciation may have influenced this but increasing global commodity prices could also be a factor in the rise in inflation in the United Kingdom and the European Union overall'.

Having strengthened to less than 91 pence per euro for the first time in nearly a month on Monday, it rose 0.1% to 90.67 pence on Tuesday and also gained 0.3% to $1.3203.

But wages have lagged consumer price rises.

Prestwood said: 'Clothing prices rising faster than previous year, along with a hike in the cost of petrol, helped nudge inflation upwards.

At the August policy event, the Bank's MPC voted 6-2 to leave rates unchanged, cut their forecasts for GDP and wage growth and expressed concerns about the economic implications of Brexit. We also have the CPI data from the U.S. a bit after that and this should also bring in a lot of volatility as it will give a glimpse of the United States inflation and tell us whether the economy continues to recover.

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What is the Bank of England interest rate?

Month-on-month, input prices went up 1.6 percent in August, reversing a 0.2 percent drop in July.

Any signs that the central bank is likely to hold off on any tapering of its quantitative easing program in the near future could put significant pressure on euro exchange rates. "They may try to downplay the increase but they could also suggest that the yield curve is too flat, implying that the market is underpricing the chance of tightening", says Lien.

Whilst markets are waiting patiently for Thursday's BoE rate decision, some attention will fall on tomorrow's Eurozone data prints, particularly the employment change data, industrial production readings and German inflation figures.

It also fell 0.3 percent against the euro to hit the day's low of 90.35 pence per euro.

"Beyond the currency effect there appear to be few underlying inflationary pressures", said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.

Households have seen their spending power diminish as wage growth tracks below inflation. Some in markets think a rate hike will arrive even earlier, attaching a more than 30% likelihood that it will arrive before the year is out.

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