UK inflation jumps to 1.6% - Natixis

Sylwia Hubar, Research Analyst at Natixis, notes that the UK inflation jumped to 1.6% in December boosted by rises in air fares and lower declines in prices for food and motor fuels than a year ago.

Key Quotes

“The inflation increased in part as producers have been passing upturns in their prices onto consumers. In the period ahead, increasing raw material costs are set to further drive factory prices higher. Subsequently, we expect UK consumer price inflation to continue accelerating over the coming months to hover above 3% in the second half of 2017. The BoE will attempt to look through a temporary rise in inflation as the amount of slack in the economy is expected to widen anew in a less favorable labor market environment.”

“The consumer prices rose by 0.5% over the month in December compared to 0.1% increase in the same period last year. The majority of goods and services have made a positive contribution to December’s inflation.”

“UK consumer price inflation will continue accelerating over the coming months as rising oil prices and pound weakness increasingly feeding through are set to drive import prices higher. In contrast, the upside pressures should be in part offset by weaker economic activity and less buoyant labor market conditions controlling domestic price pressures.”

“All in all, we expect that inflation accelerating to above 3% in the second half of 2017 will be met with relative modest increase in demand pressures for higher wages, as companies will keep earnings growth contained in an uncertain Brexit environment and to offset rising import costs. As a result, the economic slack is set to expand anew and so BoE will likely hold a wait-and-see stance throughout 2017.”