Another transitory print in UK inflation

The outlook for UK's house prices is important, the ONS house price index surprised modestly to the upside in August (the house price data lag the inflation release by one month) and an acceleration in house price growth poses upside risks to RPI.

"UK CPI inflation is expected to fall further into negative territory in October declining to -0.2% y/y, before slowly returning to positive territory around the end of the year, supported by energy base effects. CPI inflation is expected to average 0.0% this year and 1.3% next year", says Barclays.

Risks to this projected CPI inflation profile are broadly balanced. While volatile components could surprise to the downside, core inflation may come in stronger than expected as services inflation could accelerate, supported by improved domestic demand conditions, including stronger wage growth.

For RPI, the key risk to the outlook is the timing of the first BoE rate hike given the pass-through to RPI via mortgage interest payments. Given that both consumer and producer price data came in again largely in line with the forecast and consistent with the view that underlying inflation pressures are yet to intensify, there is adjustment slightly in the projected inflation profile.

"The core prices will move around 1.0% on average until year-end. UK's headline CPI inflation is likely to reach 1.7% towards the end of 2016, slightly below a peak of +1.8% previously projected for November 2016. Currently two 25bp rate hikes are expected in 2016, in Q2 and Q4", added Barclays.