3 Numbers: UK inflation to rise, and keep rising
- UK consumer price inflation expected to turn higher in September
- Firmer inflation is also expected in today’s US report for September
- Economists see a modest pullback for US home-builder sentiment
That’s a striking forecast when you consider that headline inflation was rising at a relatively sluggish 0.6% rate for the year through August. But substantially stronger inflationary winds are set to blow in the near term.
“CPI inflation should jump up in September, and looks set to rise quickly over the coming months,” according to a research note from Capital Economics. “A rise in September looks inevitable. The drop in sterling and rise in dollar oil prices has seen fuel prices at the pumps rise by over 1% in September.”
The crowd sees a fractionally lesser increase in the inflation trend for today’s September update, but just barely. Econoday.com’s consensus forecast is looking for a 0.9% year-over-year rise for the consumer price index at the headline level. That’s still a tame pace, although a 0.9% advance would mark the highest rate in nearly two years.
A 0.9% rise is still well below the Bank of England’s (BoE) 2.0% inflation target. Nonetheless, the market will probably interpret a bounce in the inflation rate as a down-payment on even stronger pricing pressure in the months to come. Nonetheless, BoE appears prepared to let inflation run hotter for longer. The bank’s governor, Mark Carney, said last week that BoE is willing to “overshoot” its 2% target if it’s productive for supporting economic growth.
The question is how much tolerance is available in the markets, the bond market in particular. The prospect of the higher inflation by way of a weaker currency has been boosting UK gilt yields lately. A substantially higher inflation rate next year implies that UK rates will continue to rise, perhaps sharply, which could take a bite out of growth.
Extending a dovish policy with firmer pricing pressures, in other words, may come at a price.
Today’s monthly change for the Consumer Price Index is expected to tick up to a 0.3% advance for September, slightly faster than the previous change, according to Econoday.com’s consensus forecast. But the core rate of inflation (excluding food and energy) is on track to dip, easing to a 0.2% monthly increase from 0.3% previously.
The bond market’s outlook for inflation, however, is pricing in a modestly firmer trend for the foreseeable future. The yield spread between the nominal and inflation-indexed 10-year Treasury yields – considered an implicit inflation prediction – has been ticking higher lately. As of mid-day trading on Tuesday, this spread was 1.70% – a five-month high.
The official inflation rate is much lower at the headline rate, although core inflation, which is considered a more reliable measure of the trend, has been above 2% all year.
“The bond market is fearful that the US Federal Reserve will fall behind the proverbial inflation curve and interest rates will rise faster than expected,” the chief economic strategist at Capitol Securities Management said last week.
An upside surprise in today’s inflation update will continue to stoke those fears while sending the market’s inflation forecast even higher.
Economists are looking for a modest setback for HMI, which is projected to slip to 63 for this month vs. 65 in September. But the forecast still leaves the index at its second-highest reading for the year so far.
“As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward,” NAHB’s chairman said last month.
Although some of September’s surge is expected to fade in today's report, analysts are still expecting a relatively solid reading. If the forecast is right, the news will boost confidence that tomorrow’s hard data release on residential housing construction will look healthy too.
– Edited by Susan McDonald