MNI 5 Things: UK CPI To Ease In February on Base Effects

--UK February Inflation Data Due for Release Tuesday

     LONDON (MNI) - In January, UK CPI inflation held firm at its annual rate of

3.0% as an increase in recreational prices offset a drag exerted by fuel prices.

Data for February, published Tuesday, will help show whether price pressures are

beginning to soften as the sterling depreciation effect fades or whether

domestically generated forces are beginning to gather momentum.

              Feb    Feb    Feb       Feb    Feb        Feb         Feb

              CPI    CPI   CPIH  Core CPI    RPI  PPI Input  PPI Output

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

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

MNI Median   +0.6   +2.8   +2.6      +2.5   +3.7       +3.7        +2.7

Prior        -0.5   +3.0   +2.7      +2.7   +4.0       +4.7        +2.8

     Ahead of the release, we outline five themes we feel warrant particular

attention.

     - February Market Consensus Tilted to the Downside. 

     Over the past decade the market consensus, taken from Bloomberg, has tended

to underestimate headline CPI inflation in February. This February it looks for

a moderation in the headline rate to 2.8%, down from 3.0% in January and in line

with the MNI median. Bloomberg's consensus has only matched the actual February

result on three occasions, while when analysts have overestimated Feb CPI it has

tended to be by a small margin (0.1pp on all three occasions). In contrast, when

is has underestimated Feb CPI, as it has done four years out of the past 10, the

margin tends to be much greater (on average by 0.18pp more).

     - Base Effects to Kick-Start CPI Softening? 

     Food (and in particular fresh vegetables which soared in price last year on

the back of bad weather conditions in southern Europe) transport and household

goods should all drag on headline CPI this month. CPI jumped a mighty 0.6pp

higher to 2.3% in February 2017 as the sterling depreciation induced price hikes

in exchange rate sensitive basket components. This year, the same price changes

won't be observed so, courtesy of the corresponding base effects, these

components should drag on CPI this February, partially reversing the 0.6pp jump

in CPI this February.

     - Fuel Prices to Drag on Headline Inflation Again. 

     Petrol prices fell 0.11% between January and February, in contrast to last

year when prices rose by 1.31% over the same period. As the latter falls out of

the y/y calculation this February, it means fuel prices should shave off at

least 0.05pp from headline CPI. A caveat, however, comes in the form of the ONS'

basket re-weighting (see point five) which could take this figure higher or

lower.

     - Sterling Stronger in February. 

     The Sterling Effective Exchange Rate rose to 79.0 in February, up from 78.9

in January, the sixth consecutive monthly rise. The gradual appreciation in the

currency should continue to filter through into softer input PPI, predominantly

via the imported materials channel. In January, imported material and fuel

prices rose by 3.5% y/y, down from 5.2% y/y a month prior, and have trended

lower ever since the January 2017 peak of 20.2% y/y.

     - We Will Receive the Updated Basket Weights for Feb-Dec 2018. 

     Tomorrow's release will include the publication of the revised weights

attached to each component of the CPI basket, set to applied to CPI calculations

from Feb 18 through to Dec 18. Last month's release had seen a revised set of

weights published for the single month of January only. Changes in weights can

impact on important categories in major categories, like airfares on transport

costs for instance, and thus can swing movements in the headline CPI number.

While difficult to call out any significant changes in advance, it is something

to keep an eye out for.

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

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com

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