Rise in UK core inflation due to timing effects

UK core CPI rebounded to +1.2% y/y in July, up 0.3pp versus June. The ONS analysis of the data highlighted clothing prices as a key driver, as clothing prices were less weak m/m in July 2015 than a year ago. This reflects varying timing of sales in 2014 and 2015; indeed, clothing prices evolved roughly as expected.

The country's July CPI data surprised as it posted 0.1% mom rise in July. The RPI/CPI basis printed at 0.9pp as per expectation, says Barclays.

Within CPI, the main sources of forecast error for Barclays were upside surprises in Food and Petrol price data. The bank had taken a pessimistic stance on both of these components given supermarket 'price wars' and a fall in petrol prices. Air fares also surprised to the upside relative to the bank's forecast. Otherwise, the main upside surprise came from the recreation and culture component, which surprisingly rose by +0.2% m/m driven separately by computer games, gardens and pets.

Within RPI, the RPI/CPI basis was in line with our forecast. However, house prices were firmer than expected but this upside surprise was offset by a downward contribution from the ever-volatile 'other differences including weights' component.

The acceleration in core inflation will likely attract most attention within the release and there is a risk that this may reverse in August, as clothing prices rebounded sharply in that month in 2014 and are unlikely to have rebounded as strongly this year. Likewise, air fares feature in the UK core aggregate and are volatile. Within core inflation, analysts see Recreation and Culture as worth watching as a bellwether of UK consumer confidence. The July inflation data is not expected to shift the MPC narrative significantly in the near term, says Barclays.