As we discussed in our Morning Lineup, early this morning the UK’s Office for National Statistics released its September inflation data. Overall, the report was somewhat mixed with consumer measures missing while PPI rose. Headline and core HICP came in at 2.4% YoY and 1.9%, respectively. These are both below estimates and the prior period’s reading. The other measure of consumer inflation, RPI (Retail Price Index), was expected to come inline with last month but this too fell to 3.3% YoY. On a MoM seasonally adjusted basis, consumer inflation fell to one of its lowest levels in the past few years as shown in the charts below. This shows the general inflation picture is settling down, but politics surrounding Brexit can have an impact down the road.
In the period following the Brexit referendum in 2016, consumer inflation ratcheted upwards for both HICP and RPI, both thanks to the collapse in GBP being passed along to consumers. Since Brexit negotiations between the EU and UK began in 2017, we have seen this trend begin to cool as the pound has stabilized, and this most recent release confirms this slowdown. The main concern is that these negotiations will not bear fruit resulting in a “no-deal” Brexit without a settlement on several hot-button issues like the North Ireland border and customs/trade plans. We generally expect the UK to avoid a “hard” Brexit and reach some sort of customs agreement with the EU, so inflation is likely to be less of a headache for the BoE going forward than it has been in recent years. Of course, a failure of negotiations ahead of the mid-March exit of the UK would mean all bets are off; that’s one reason to expect little policy change from the BoE over the next few months.