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UK inflation in surprise fall - HL comment

Ben Brettell, Senior Economist, Hargreaves Lansdown:

Amidst all the talk of ‘Trumpflation’ across the pond, the UK’s inflation rate has confounded expectations by falling in October.

Economists had expected a small uptick from 1.0% to 1.1% - a continuation of the recent upward trend – but instead the ONS reported inflation fell to 0.9%. The main downward contributors were clothing prices and university tuition fees, both of which rose by less than a year ago. Sterling fell sharply on the news, losing around half a cent against the US dollar.

Today’s surprise fall looks like a blip, as sterling weakness continues to raise the cost of inputs for UK businesses. The cost of raw materials and fuels bought by UK companies jumped at the highest monthly rate on record in October, with total input prices up 4.6% from September.

It should be only a matter of time before this feeds into higher consumer prices. The Bank of England now expects inflation to hit 2.7% next year, but some analysts are predicting it will reach 4% as sterling weakness pushes up import costs. With wage growth expected to be weak in the wake of the vote to leave the EU, real wages look set to fall next year.

However we need to remember that sterling’s drop, assuming it doesn’t continue to plummet, is a one-off factor, which will fall out of the year-on-year calculation in twelve months’ time. The bigger picture is that structurally there are very few inflationary pressures – due in part to demographic reasons. The baby boomers are starting to retire in their droves. They have already gone thorough their consumption phase – they have bought their houses, cars and consumer goods. The generation behind them is saddled with debt and struggling to get on the housing ladder. There is also no sign of any tightness in the labour market, with wage growth seemingly set to remain depressed. All this should mean less inflationary pressure, lacklustre economic growth, and little upward pressure on interest rates.


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