UK: CPI inflation to rise further this year, reaching levels around 3% - Deutsche Bank

According to Markus Heider, Economist at Deutsche Bank, UK inflation surprised to the upside in February, with details showing a broad-based increase and clear evidence of upward pressure from the weaker currency and higher energy costs and they see both CPI and RPI inflation rising further this year, reaching levels around 3% and 4% respectively in Q4.

Key Quotes

“UK inflation surprised to the upside last month, and for both, RPI and core CPI, three out of the last four prints have been above consensus forecasts, suggesting inflation may be on an above-expectations trajectory. The increase in inflation in February was broad-based, with clear evidence of upward pressure from the weaker currency and higher energy costs. Looking at the main components separately, energy contributed about 0.1pp to the 0.5pp acceleration in headline y/y CPI inflation, and while lower oil prices will put downward pressure on petrol prices, rising utility bills will likely mean that overall energy inflation stays high in the coming two months.”

“Food inflation rose strongly as suggested by leading indicators such as PPI, as well as business surveys. Upward pressure from a stabilisation in global agricultural prices and a weaker exchange rate may have been amplified by a weather related decline in seasonal food supply, as had been signalled by similar trends in the euro area and the food (including alcohol and tobacco) aggregate contributed about 0.1pp to the rise in overall y/y CPI inflation last month. Further increases in food inflation can be expected in the coming months, although in February food producers reported slowing input cost inflation for the first time in almost one year.”