UK inflation surge to hit spending next year - ING

A weaker pound continues to push up inflation, but the risks of lower consumer spending and investment in 2017 matter more for the Bank of England suggests James Smith, Economist at ING.

Key Quotes

“Headline CPI picked up to 1.2% YoY in November, a touch above consensus, and core inflation continued to move closer to 2%, coming in at 1.4%. This is further evidence that higher input prices owing to a weaker pound are starting to meaningfully push up inflation. Petrol prices increased significantly in November, and food prices ticked up as the currency effect starts to outweigh the impact of the prolonged supermarket price war. It is also likely that there may be underlying impetus from the introduction of the National Living Wage, which appears to be pushing up costs for retailers.”

“Our biggest concern for 2017 is a squeeze in household spending power. The BoE’s inflation expectations measure recently surged to 2.8%, driven primarily we think by higher fuel costs. Take this together with the sharp fall in GfK consumer confidence last month (now not far off the immediate post-Brexit low) and it seems that households are already acknowledging the risks of falling real wages. This hit to disposable incomes is a key reason why we think growth could slow to 1.1% next year.”

“What does this all mean for the Bank of England? Well, like in 2009 and 2011 when inflation peaked above 5% (by comparison, we expect CPI to reach around 3% next year), we think the BoE will be happy to look through recent price pressures. The risks to consumer spending and investment are more important for policymakers. We still think markets are underestimating the risk of further stimulus from the Bank of England next year.”