UK CPI: October Update

James Mee comments on the latest figures

The UK announced a fall in inflation of 0.1% this morning, behind analysts' forecasts of 0%. 

Much will be written about this, with many suggesting that rate rises look ever more distant (a point of view with which we agree) and calling to question the Bank of England’s ability to reach the 2% target. Indeed, the market seems to think so: yields on the 10Y Government Bond have tightened by 1.2 basis points to 1.81%* at the time of writing. 

In analyzing the latest inflation print properly, we break down CPI into its component parts. Having done so, it is interesting to note that the main detractor to consumer prices was transport, falling 2.5%, with the main price decrease coming from air travel (-20.4%). Food & Non-Alcoholic Beverages posting a 0% print having been consistently negative through most of 2015 is also notable. 

The key reason for falling air (and sea) travel prices is the second order effect of falling commodity prices, most notably oil: as these input prices fall, airline (and ferry) companies can pass on lower prices to consumers. As regards Food & Alcoholic Beverage prices flattening, this is likely due to a slower pace of price cutting by major supermarket chains. 

Having analysed the data, we do not believe there will be a sustained deflationary swing. We expect inflation to pick up moderately as and when there is a stabilisation of commodity prices, but that it will remain structurally lower for longer. 

*Source Bloomberg
** All other figures sourced from Factset

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