MNI 5 THINGS: UK CPI Seen Higher; Beware Downside Trend

     LONDON (MNI) - The UK's 12-month CPI inflation rate was 2.4% in June,

unchanged from May, with upside pressure from higher fuel and air fares

neutralised by downward pressure from recreational goods, specifically PC games,

food and drink and furniture. Amongst analysts, the consensus view looks for a

moderate pick up in July, but for inflationary pressures to fall back beyond

this.   

              Jul    Jul       Jul    Jul        Jul         Jul

              CPI    CPI  Core CPI    RPI  PPI Input  PPI Output

            % M/M  % Y/Y     % Y/Y  % Y/Y      % Y/Y       % Y/Y

----------------------------------------------------------------

MNI Median    0.0    2.5       1.9    3.4       10.3         3.0

Prior         0.0    2.4       1.9    3.4       10.2         3.1

     Ahead of the release, we flag five themes we feel warrant attention. 

     Analysts' Conservative in July: 

     In the last decade, analysts have displayed a tendency to underestimate CPI

inflation in July. Whilst getting the result correct three times during this

time, analysts underestimated the result five times with an average miss of

0.16pp. They overestimated July CPI just twice, with an average miss of -0.15pp,

but one of these did arrive last year, with the other also in the last 5 years.

This suggests that at 2.5%, the consensus expectation comes with a degree of

upside risk.    

     Historical Downside Risk:

     While the point above suggests a 2.5% result may be slightly conservative,

history suggest there is a chance for inflation to actually fall further in

July. Since 1998, prices have fallen by an average 0.23% m/m in the month of

July. If this materialised between June and July this year, it would have been

consistent with a 0.1pp decline in the annual rate to 2.3%. So far this year,

the average deviation from the 1998-2017 average m/m CPI rate and the realised

2018 m/m rate has been zero.       

     Fuel price jump to add 0.02-0.03pp to CPI:

     Pump prices look set to have made another positive contribution to headline

inflation in July. Accountable for 0.15pp and 0.1pp of upside pressure in May

and June, petrol and diesel prices looked to have provided around 0.02-0.03pp

worth of inflationary pressure last month. Petrol prices, though down 0.6% m/m

in July, fell by more last year (-1.2% m/m), with diesel prices, down 0.3%

between May and June, also down by less versus the same time a year ago (-1.4%

m/m).  

     Other Forces at Play (1): Catching observers off-guard last month, clothing

and footwear prices registered their weakest June reading (-2.1% m/m) in six

years and was largely responsible for keeping inflation steady at 2.4% in June.

Upward pressure could be present in July if retailers unwound promotions,

supplemented by any further utility bill hikes. 

     Other Forces at Play (2): 

     Games, toys and hobbies also provided downside pressure in June, but this

is a volatile component, dragged around by PC games, and difficult to forecast

on a monthly basis. As a guide, the component has generally recorded a price

fall in July -- on average -1.00% m/m since 1996 - but prices fell by an

outsized 1.5% m/m last July so providing a smaller decline is notched in July it

should generate upward pressure.      

     Bonus:

     BoE updates its CPI forecast Alongside last Thursday's 25 basis point rate

hike the BoE MPC also gifted us with an updated set of macroeconomic forecasts.

The August Inflation Report now sees CPI above the Bank's 2% target (when taken

to 2 decimal places) for the entire forecast horizon unlike the May print which

saw it converge to 2% by the second half of 2020. The main driver for the

elevated CPI forecast was, short-term, a weaker sterling, higher oil prices and

longer term, more intense domestically generated inflation stemming from excess

demand.     

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com