Fall in inflation relieves pressure on MPC to raise rates this year – Smith & Williamson
Reacting to the latest Consumer Prices Index (CPI) inflation reading from the Office for National Statistics, which showed CPI came in at 2.6% in June, Thomas Wells, manager of the recently-launched Smith & Williamson Global Inflation-Linked Bond Fund, said:
“Headline CPI came in at 2.6% yoy in June, slightly weaker than expected. This outturn will relieve the pressure on the MPC to raise rates this year. However, it is worth remembering that UK index-linked gilts are linked to RPI, which remains elevated at 3.5%.
“While CPI remains above the official target of 2%, and will likely remain so for the next few months, its rise this year has been largely driven by the decline in sterling following the EU referendum result, which has resulted in an increase in the cost of imports. In terms of the year-on-year CPI numbers, we expect these anniversary effects to keep the headline rate supported over the summer. The annual inflation rate should then drop back in the autumn as last year’s slump in the pound falls out of the data.
The real story in the UK is wage inflation, where growth is still negative in real terms – i.e. running behind inflation – and has been for the last three months. We see the BoE looking though the inflation data while trying to keep policy accommodative. Therefore, we would expect CPI inflation to head back down, getting closer to the targeted 2% as we enter 2018.”