UK: Wages and sterling to drive prices up again

3 min
Ana Boata
Ana Boata Senior Economist for Europe

Consumer price index (CPI) growth slowed down to 2.2% y/y in September from 2.4% in August. Core CPI inflation moderated to 1.9% y/y from 2.1% in August. Prices for food, non-alcoholic beverages, transport, clothing and recreation/culture fell compared to last month. This was partially offset by upward contributions from increases in electricity and gas prices. However, over the past 12 months, prices for transport, housing and household services, restaurants and hotels and recreation/culture have been the biggest positive contributors to the CPI. Looking ahead, we expect inflation to pick-up again given the acceleration in wages (+3.1% y/y in the period June-August) and the sterling depreciation stemming from higher Brexit-related uncertainty. We expect the Bank of England to wait for the Brexit agreement to be confirmed by January 2019 before committing to further interest rates hikes. Hence, we pencil in a +25bp increase in the key interest rate to 1.0% in Q2 2019.