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16 Dec 2014
Inflation risks are to the downside in the near term for UK – ING
FXStreet (Barcelona) - James Knightley of ING notes that there exists downside inflation risks for UK in the near term, but 2H15 should see inflation move higher due to economic strength, weak sterling and a turn in commodity prices.
Key Quotes
“After peaking at 5.1%YoY in September 2011, UK consumer price inflation (CPI) has been on a downward trend, hitting a five year low of 1.2% in September. It rose modestly in October to 1.3%, largely due to the fact that the monthly drop in petrol prices wasn’t quite as big as the drop seen in October 2013.”
“With employment having risen strongly and pay possibly set to follow in coming quarters, business costs will rise. In an environment of strengthening demand and strengthening corporate pricing power we may see these costs increases partially or fully passed onto the end consumer. Consequently, inflation may start to rise from 3Q15 onwards.”
“Furthermore, if the stimulus efforts from the likes of the Eurozone, Japan and China prompt stronger activity globally we could see commodity prices start to rise off their current lows, which will add to inflationary pressures.”
“With the US Federal Reserve looking increasingly likely to start raising interest rates next year we are very bullish on the prospects of the dollar, which would add to the cost of importing US dollar priced commodity products into the UK – we see GBP/USD falling to 1.49 in 12 months. Indeed, sterling weakness could be intensified by UK political uncertainty given the wide range of possible outcomes for the May 7th UK General Election”
“In the near-term a sub-1% inflation situation offers the BoE plenty of room to leave policy loose, with little prospect of higher interest rates until after the May General Election. Thereafter, with growth set to remain firm and inflationary pressures likely to build we expect slow and steady policy tightening with Bank Rate predicted to reach 2.25% by end 2016.”
Key Quotes
“After peaking at 5.1%YoY in September 2011, UK consumer price inflation (CPI) has been on a downward trend, hitting a five year low of 1.2% in September. It rose modestly in October to 1.3%, largely due to the fact that the monthly drop in petrol prices wasn’t quite as big as the drop seen in October 2013.”
“With employment having risen strongly and pay possibly set to follow in coming quarters, business costs will rise. In an environment of strengthening demand and strengthening corporate pricing power we may see these costs increases partially or fully passed onto the end consumer. Consequently, inflation may start to rise from 3Q15 onwards.”
“Furthermore, if the stimulus efforts from the likes of the Eurozone, Japan and China prompt stronger activity globally we could see commodity prices start to rise off their current lows, which will add to inflationary pressures.”
“With the US Federal Reserve looking increasingly likely to start raising interest rates next year we are very bullish on the prospects of the dollar, which would add to the cost of importing US dollar priced commodity products into the UK – we see GBP/USD falling to 1.49 in 12 months. Indeed, sterling weakness could be intensified by UK political uncertainty given the wide range of possible outcomes for the May 7th UK General Election”
“In the near-term a sub-1% inflation situation offers the BoE plenty of room to leave policy loose, with little prospect of higher interest rates until after the May General Election. Thereafter, with growth set to remain firm and inflationary pressures likely to build we expect slow and steady policy tightening with Bank Rate predicted to reach 2.25% by end 2016.”