Inflation undershoot takes pressure off Carney

Added 15th November 2016

The Office for National Statistics has reported inflation dropped to 0.9% in October, slightly undershooting consensus forecasts of 1.1%.

Inflation undershoot takes pressure off Carney

Many economists had expected the figure to tick up from September’s 1.0% as inflationary pressures generated by a falling pound and rising oil price hit home.

The figure will ease the pressure on Bank of England governor Mark Carney who came in for criticism after he cut rates to 0.25% in the wake of the Brexit vote, only to see inflation return to the economy the following month.

This respite is likely to be short-lived according to some, potentially forcing Carney’s hand sooner rather than later if the Bank’s 2% target is not to be exceeded.  

“Ignore inflation at your peril in the post-Brexit world,” said Tommaso Mancuso, head of multi asset at Hermes Investment Management. “In the short term, we expect the rate of inflation to continue to drift up, buoyed by the stabilisation of commodity prices and sterling’s fall. Over the medium term, both the likely expansion of fiscal policies and central bank willingness to tolerate inflation overshoots could further fuel inflationary pressure. The sharp reaction of government bonds to Donald Trump’s victory is indicative of how sensitive global assets can be to changes in inflation expectations and a reminder of the importance of carrying some degree of inflation protection at all times.”

Alex Brandreth, deputy CIO at Brown Shipley, expressed similar sentiments. “Although today’s inflation reading is slightly lower than expected, UK inflation is set to increase over the coming months due to the recovery in commodity markets and the sharp declines in sterling following the UK’s decision to leave the EU.”

“Inflation was making some unexpected headlines last month as Unilever attempted to raise the price of love-it-or-hate-it spread Marmite,” he continued. “Unilever also attempted to raise the price of ice cream brand Ben and Jerry’s, and if one of the world’s largest consumer products companies is attempting to mitigate sterling’s slump by raising its prices it seems likely that others will be following suit. This ‘bad inflation’ could be around for the next few months, so expect to see more headlines.”

“Fears of increasing inflationary pressures percolating into the UK economy proved premature as data this morning showed CPI numbers coming in lower than consensus expectations,” added Tom Floyd, senior sales trader at Foenix Partners. “With ‘MarmiteGate’ and the falling towers of Toblerone fresh in the consumer psyche, fears of rising inflation and the subsequent impact to consumer purchasing power are prevalent with many looking to the central bank to react. The lower print should provide some respite and eases pressure on Mark Carney to reverse his recent cut, however, with the pound still weak and prices rises likely coming, markets will still assume the next move is higher rather than lower.”

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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