2017.04.2018:59:00UTC+00U.k. Inflation Likely to Accelerate Further in Months Ahead, to Return to Boe’s Target Rate by 2018-2019

U.K.’s consumer price inflation is currently above the central bank’s 2 percent inflation target for the first time since the end of 2013 and is up from the negative rate seen at the end of 2015. In March, the nation’s annual CPI rate was stable at 2.3 percent. Inflation is expected to further accelerate in the months ahead with inflation reaching a peak of 3.25 percent by autumn, according to a Scotiabank research report.

“We expect inflation to return towards the Bank of England’s 2% target over the subsequent 18-month period”, noted Scotiabank.

Recently, there has been a clear evidence of the impacts of the weaker pound putting upward pressure on inflation. The core goods category of inflation has accelerated and is likely to further rise to a peak of 3 percent year-on-year. Moreover, domestic energy bills, higher food price inflation, package holidays, airfares and taxes on tobacco and alcohol should make sure that the headline inflation accelerates to above the 3 percent upper boundary on the central bank’s target range.

Unless the GBP exchange rate continues to depreciate persistently, the upwards pressure from imported inflation will at some point start to dissolve, resulting in the headline inflation to come back towards the 2 percent target in 2018-2019, added Scotiabank.

Significantly, services sector inflation has stayed subdued in the last two years and is likely to stay the same in 2017. The lack of acceleration in wage growth is a main reason for weak services sector inflation.

“We expect wage inflation to move sideways during 2017, implying limited upside for services inflation”, stated Scotiabank.