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UK Inflation expected to turn negative

The ONS will release their latest reading of UK inflation at 9:30am this morning, and there is a strong chance that the reading will be negative. The previous inflation reading was zero, in short prices measured on a basket of goods, were unchanged from the previous month. The Bank of England’s mandate is to target a 2% inflation rate; during the financial crisis this was consistently overshot peaking above 5%. The Governor, Mervyn King would write a letter to the Chancellor explaining why the central bank had missed its target.

As prices drove higher led by energy and food prices, wage growth was non-existent, consumer expenditure was squeezed. With a larger proportion of income for the average consumer being spent on necessary items, there was limited upside for economic growth.  

Move forward a few years, there is a new Bank of England governor (Mark Carney), however the MPC continues to sit on their hands.

Interest rates and zero inflation

A normal trade-off for low interest rates is inflation, as borrowing costs are reduced, assets prices should be pushed higher. The 6 year anniversary of record low rates (0.50%) has passed, with some analysts detailing the need for a raise in interest rates to contain asset prices; this is a contrast to the banks mandate. Employment is at a seven year high,

The Bank of England and the NIESR both cut their growth forecasts for the UK economy last week, as Sterling rallied following the outcome of the UK election.

Inflation Outlook

If the ONS reading is negative for CPI, it would be expected that Sterling would weaken in the FX markets as the “need” for a rate hike would be minimal.  The BoE inflation report forecasts inflation to return to the 2% target in two years’ time. Oil prices have rebounded from the April lows, to be trading around $60/barrel, this should trickle through to input prices and be a driver of inflation from zero along with the tightening of the labour market.

ONS CPI (inflation) is released at 9:30am London

GBPUSD: 1.5610

EURGBP: 0.7161

FTSE 100: 7,001


Inflation turns negative for first time since 1960

The ONS inflation reading for April 2015 fell 0.1% compared to zero in March.

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