Kristin Forbes will feel vindicated after today’s CPI report. The outgoing MPC member’s dissent at last week’s BoE meeting, in favour of a rate hike, appears prescient after core CPI inflation hit 2.0% last month.
The BoE is unlikely to overreact: the decision to lower its estimate of the NAIRU last month has given it more room to tolerate above-target inflation. There are structural factors that permeate far deeper than the transitory impact of oil prices and currency fluctuations.
Services prices are rising more quickly because of higher transport costs, but other components remain subdued. The drop in the y/y for average weekly earnings in last week’s labour force survey confirms that domestic price pressures are unlikely to materialise. Technology is highly disruptive. The rally in sterling and sell-off in the short-end of the gilt market may be short-lived.
Summary
- Domestic price pressures still weak
- Higher services inflation mostly due to transport, unlikely to be sustained
- Finance and retail disrupted by technology
