UK: Downside surprise in inflation - Nomura

According to analysts at Nomura, UK’s CPI inflation surprised consensus forecasts modestly on the downside in April – though not those of the Bank of England, meaning that we should not interpret the latest figures as raising the risks to their view that the Bank will resume hiking rates from August.

Key Quotes

“There do remain a number of risks to this rate view of course. One risk relates to our and the BoE’s assumption that economic growth will recover after temporarily slowing over recent months. Another relates to domestically generated inflation (DGI) – which the BoE believes will rise to fill the gap in headline CPI inflation left by the fading currency depreciation effect. As the Bank notes, there are a number of measures of DGI that look to be rising. However, our own “empirical” measure of DGI (based on components of the CPI that are least influenced by the exchange rate) remains weak.”

“Changes in sterling can take a long time before they fully affect inflation, but it appears that the peak impact has now been felt. The 5% rise in the trade-weighted index (which includes its recent decline) over the past nine months may also go some way towards moderating the upside impact of FX on inflation in the coming months.”

“Producer output price inflation is likely to rise in the near term thanks to oil prices, but we see the effect being short-lived and a decline in upstream price pressures from the end of this year should herald a fall in headline consumer price inflation towards its 2% target given the tight relationship between the two measures.”