Tuesday’s UK consumer price index (CPI), released for the month of August, remained unchanged at 0.6% year-on-year compared to July.
The monthly rise of 0.3% was smaller than expected due to lower prices for clothing, hotels and alcoholic beverages, which contained upward pressure from food, fuel prices and airfares.
This data joins a wide array of data surprises since the 23 July Brexit referendum, which suggest that the economy remains resilient in the post-referendum phase, at least until the Brexit process will officially begin with the triggering of Article 50 of the Lisbon treaty. Inflation was expected to be on the rise due to pound depreciation, causing higher import prices.
We believe that August was simply a breather until the currency effects kick in. First evidence that a rise of inflation is waiting around the corner can be found in various data: producer input prices are on the rise, and last week’s purchasing managers’ indices showed increases in the prices charged sub-index of the services sector, as well as in the input prices sub-index for the manufacturing sector.
The feed-through to consumer prices is only a matter of time. For the Bank of England’s (BoE) Thursday policy meeting, this information will have little consequences. After offering Brexit-countermeasures last month, the BoE will acknowledge post-referendum resilience, but will not be so foolish not to see that the economic impact of the Brexit has simply been delayed, but not cancelled.
The pass-through of a weaker currency to inflation was not visible in August, but will kick in during the coming months. Rising inflation will not hinder the Bank of England from further measures, if warranted, once the implementation of the Brexit begins – the central bank is willing to allow for an inflation overshoot next year.
David A. Meier is economist at Julius Baer