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Inflation jumps, will it keep on rising?

13/12/2016

Inflation rose in November, will it keep on rising?

UK inflation rose to 1.2% in November. But when you drill down, things get interesting.

Core inflation – which excludes food, energy and tobacco, is meant to give a better feel for underlying inflation, and it also rose, this time to 1.4%.

But when determining the change in inflation each month, there are two things that matter: Month on month inflation in the month just gone, and month on month inflation in the same month a year ago.

In January 2016, month on month inflation was minus 0.8%. Unless inflation in January 2017 is similarly low, expect the annual rate to shoot up. We will know about this is two months’ time.

Don’t be surprised if inflation hits 2% very early next year.

Looking beyond that, it boils down to the effect that the falls in the pound had. That will hit hard, and by the way, it seems to have already lifted IT costs – according to the data. But don’t forget, the pound has come someway back since, so that will alleviate pressure.

Ian Shepherdson, chief economist at Pantheon Macroeconomics said: "The trend in core inflation still seems more or less flat, but it would be very dangerous to assume this will continue, given the usual lags between shifts in sterling and inflation at the consumer level. The headline rate is now clearly rising rapidly and has much further to go.”

Ruth Gregory, UK economist at Capital Economics said: "We don’t think that the expected overshoot of the two per cent target will be too much of a headache for the MPC. Indeed, if the after-effects of sterling’s 2008 depreciation are anything to go by, the drop in the pound shouldn’t have a permanent upward effect on inflation expectations or wages growth. As such, we expect the MPC to keep interest rates on hold at this Thursday’s meeting and for a long time to come.”

Originally posted on Fresh Business Thinking

 

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