UK CPI Annual Inflation Rate Unexpectedly Declines To 0.9%

UK consumer prices (CPI) rose 0.1% in October following a 0.2% gain the previous month. The annual inflation rate declined to 0.9% from 1.0% the previous month and was significantly below the expected rate of 1.2%, although it was still the second-highest rate seen since the end of 2014.

The core rate was also weaker than expected with the annual rate declining to 1.2% from 1.5% and compared with expectations of a marginal decline to 1.4% for the month.

There was a smaller increase in clothing prices and University tuition fees than seen last year and there was also a decline for non-alcoholic drinks, which help curb potential upward pressure on the inflation rate.
Furniture prices rose for the month, the first October increase since 1997.

Transport costs also increased sharply on the month and put significant upward pressure on the overall inflation rate and higher transport costs will feed through into the economy over the next few months.

UK consumer prices fell marginally in the period from November 2015 to April 2016 and a repeat performance is unlikely this year unless there is action by the government to temporarily cut indirect taxes to help support the economy. If there is no cut in taxation, there is still the potential for sharp upward pressure on the year-on-year inflation rate over the next few months with the headline rate liable to move to at least the 2.0% area.

The data will, however, dampen immediate speculation that the Bank of England could be forced to raise interest rates to prevent a serious overshoot of the 2.0% inflation target.

Sterling weakened immediately after the data with GBP/USD dipping to the 1.2400 area from 1.2430, while EUR/GBP strengthened to the 0.8700 area. There was a recovery in gilts, although moves were relatively mild in comparison with recent losses, while the FTSE index was higher by close to 1.0% on the day.