UK Inflation to dip further into negative territory in October

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, its been only adjusted slightly to projected inflation profile.

"We now expect CPI inflation to average 0.0% this year and 1.3% next year, a touch below our previous forecast of +0.1% and +1.4%, respectively, mainly reflecting a slightly lower assumption for core prices; indeed, being the only component surprising slightly to the downside in September relative to our projection . Our RPI profile has also moved lower for the same reasons", says Barclays in research note.

In the very near term, forecast CPI inflation is expected to dip further into negative territory in October declining to -0.2% y/y (with small upside risks as clothing and footwear prices could rebound more than analysts currently assume), before slowly returning to positive territory around the end of the year, supported by energy base effects.

"We expect instead core prices to hover around 1.0% (on average) until year-end. According to our latest profile, 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",added Barclays.

Risks to 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. Barclays currently forecasts two 25bp rate hikes in 2016, in Q2 and Q4. Additionally, the outlook for 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.