MNI 5 THINGS: UK CPI To Ease On Unwind Of Transitory Factors

By Les Commons

     LONDON (MNI) - UK inflation probably moderated in September from August's

six-month high, data from the Office for National Statistics (ONS) is expected

to show Wednesday. The CPI 12-month inflation rate registered at 2.7% in August,

with upside pressure stemming largely from recreational goods, including theatre

tickets and PC games. The consensus view among analysts is that inflation

moderated to 2.6% in September.

              Sep    Sep       Sep    Sep        Sep         Sep

              CPI    CPI  Core CPI    RPI  PPI Input  PPI Output

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

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

MNI Median   +0.2   +2.6      +2.0   +3.5       +9.4        +2.9

Prior        +0.7   +2.7      +2.1   +3.5       +8.7        +2.9

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

     Analysts' Mixed Track Record. 

     MNI's 'hit/miss analysis' shows analysts have found it hard to call

headline inflation in September. Since 2008, they have correctly projected the

rate just three times, overestimating it three times (average data surprise:

-0.17pp) and underestimating it four times (average data surprise: +0.18pp).

This September, analysts look for a 0.1pp moderation to 2.6% and see core

inflation falling by the same margin to 2.0%.

     Services Inflation Set to Moderate. 

     Base effects imply that annual inflation rates for a number of items in the

CPI basket - especially services such as recreation & culture and transport -

will have cooled in September. This is highlighted in Table 2 below, which shows

that robust y/y inflation rates for recreation & culture in July and August were

boosted by a weak base in Jul-Aug 2017. As prices started to pick up more

robustly last September, price changes this September will have occurred from a

higher base, suggesting that annual services inflation likely moderated. Sea

fares, which recorded a 17.2% m/m rise in August, will likely post a monthly

retraction in September, in line with the historical trend.

     Food Inflation Set to Ease Too. 

     Given that food inflation jumped 0.8% m/m in September 2017, its largest

September rise in ten years, the annual rate probably moderated last month. This

is supported by September's BRC survey, which showed food inflation holding

steady from August at 0.4% m/m and 1.9% y/y. Lower crop yields, as a result of

the warm summer weather, was a key factor behind the recent acceleration in food

inflation. Cooler temperatures should see a reversal of this trend, particularly

as recent survey data points to alleviating cost pressures. As food accounts for

9% of the overall basket, this could provide significant downside pressure to

headline CPI inflation.

     Utility Hikes to Exert Upward Pressure. 

     September tariff hikes from E.O.N, Co-Op, Green Star and EDF, who

collectively make up just over a quarter of the UK electricity market, will

exert upward inflationary pressure. The impact is likely to be exacerbated by

the lack of a similar increase in September last year. Moreover, further tariff

hikes are in the works - British Gas, Scottish Power and OVO Energy are all set

to raise their prices in October.

     Fuel prices to detract 0.08pp from CPI. 

     Pump prices look set to have weighed on headline CPI by just shy of a tenth

of a percentage point in September, according to calculations performed by MNI

using the ONS' weekly road fuel data. Petrol prices (down 1.3% m/m in September

vs a 2.2% m/m rise in September 2017) and diesel prices (up 1.2% m/m in

September vs a 2.1% m/m rise in September 2017), will shave 0.07pp and 0.01pp

respectively from the headline inflation rate.

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

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