Posted October 18, 2016 Ashley Chadwick
This morning UK CPI came in at 1% Year on year, the highest level since October 2014. It also marks a return to the target range of 2% +/- 1% set by the Bank of England. This means that if inflation remains at this level or pushes on higher as many expect, Mark Carney will no longer be required to write a letter explaining why inflation is not within target.
The instant reaction to the news showed Sterling appreciating, however this move was quickly pared and Cable is back to trading at $1.2250. This was because the higher inflation figures was somewhat expected due to the weak Pound. The struggling currency makes British imports more expensive and this is causing prices to rise, as the recent Tesco and Unilever dispute highlighted. Furthermore, the price of Oil has risen recently to 15 month highs, causing the price of fuel to go up, just as the cold weather arrives. With talks of an OPEC deal, and little sign of strength in the Pound, these factors seem set to keep inflation rising.
The higher inflation is in part desire by the Monetary Policy Committee and their recent lowering of the interest rate and increase in QE was expected to cause inflation. In the last week or a number of MPC members, including Governor Carney have suggested that inflation may well exceed the 2% target, and perhaps even rise over 3% as a result of their actions. Inflation hasn’t been above target since December 2013 and hasn’t exceeded 3% since April 2012. Carney also said that this would be an acceptable cost to help stimulate the economy and counteract the perceived negative impacts of Brexit. This higher than expected inflation data is therefore unlikely to change their minds about further stimulus that may be needed and a further cut to interest rate is expected by early 2017.
This helps to explain why there has been so little reaction in the value of the Pound in the first half hour of trading after the news. The MPC members have been clear about the path of actions they intend to take and slightly higher inflation will not cause them to deviate, especially when inflation is expected to rise.
Picture from Bank of England, via flickr