UK inflation Preview: Brexit uncertainty and rising wages push UK inflation higher

• The UK consumer price index (CPI) is expected to accelerate to 2.5% y/y in October.
• Core inflation stripped off food and energy items is expected to accelerate to 2.0% y/y. 
• Real wages are set to increase as the growth rate of wages is faster than prices.

After September marking an unexpected deceleration in the UK inflation, the October UK headline inflation is expected to have accelerated to 2.5% y/y in from 2.4% y/y in September while core inflation stripping the consumer basket off food and energy prices is seen accelerating to 2.0% y/y from 1.9% in previous month, the Office for National Statistics is expected to report on Wednesday, November 14 at 8:30 GMT.

Development of the UK headline inflation is likely to reflect the transport prices having a significant upwards effect on prices with a 5.5% increase over the year in September making it the largest upward inflation contributor in September. 

Although the UK inflation is not any more affected purely by the effect of post-Brexit Sterling’s depreciation, the pullback of Sterling from April highs and the loss of some 18 big figures against the US Dollar in light of rising Brexit deal uncertainty will still have some influence on rising import prices as well. 

The heat of the moment though is the Brexit deal that is about to be finished these days. The UK Prime Minister Theresa May told UK Cabinet that Brexit negotiations continue In Brussels with good progress with talks nearing the “endgame.” According to the UK Cabinet, the text of the hot issue of the Irish border backstop is already out prepared.

The Bank of England Deputy Governor Ben Broadbent said earlier this week that “if we were to leave without a deal, likely you would see currency fall” while he stressed that reaching the deal is still the most likely outcome.

The rise in the headline inflation in the UK is still lower than the growth rate of nominal regular pay in the UK (excluding bonuses) that rose 3.1% over the year in three months ending in September making the real, inflation-adjusted wages up 0.9% y/y.

Commenting on the economy Broadbent said he sees signs of somewhat weaker Q4 GDP growth in the UK as the Brexit uncertainty still weighs on business investment while the growth is still enough to press the wages higher.

The Bank of England Governor Mark Carney said during the November Inflation Report press conference that “demand growth exceeds potential supply growth and that supports a further firming of domestic inflationary pressures.”

“Taking waxing domestic and waning external influences on inflation together, CPI inflation is projected to remain above the target for most of the forecast period before reaching 2% by the end of the third year,” Mark Carney added indicating that the Bank of England sticks to its one-rate-hike-a-year monetary policy outlook justified by inflation well above the target.