U.K. annual headline inflation remains unchanged in October, slightly below expectations

The headline inflation in U.K. remained at the five-and-a-half-year high of 3 percent year-on-year in October, coming in slightly below consensus expectations of 3.1 percent. This was also below the expected figure of the Bank of England. The increase in cost of food was countered by cheaper fuel prices. Food cost rose 4.2 percent year-on-year, which is the sharpest increase in four years. It was supported by the continued softness of the British pound.

Meanwhile, the core inflation also remained the same at 2.7 percent, while the annual RPI rose to 4 percent from 3.9 percent. Still both these rates continue to be at, or close to, five-year highs, noted Lloyds Bank in a research report.

The consumer price inflation is expected to stay around the 3 percent threshold in the months ahead. It is touch and go whether the Chancellor will need to write a letter, stated Lloyds Bank. Increase in energy prices and likely rises in excise duties in the upcoming budget are areas of possible upside risk. In the past month, prices of oil have risen by more than 10 percent, stimulated by signs that OPEC will extend output cuts past next March.

The effect of the depreciation of the pound is also likely to keep the import price inflation elevated. Still, the effect of the latter might wane from early 2018. Nearly all the recent rise in U.K. inflation could be linked to the fall in the pound. Therefore, inflation should fall back as the currency base effects wane. But domestic price pressures stemming from increasing wages and tightening capacity restraints are likely to build.

“Overall, we expect these forces to bring inflation only gradually back towards 2% over the next three years, with the risk that the overshoot proves larger and more protracted”, added Lloyds Bank.

At 13:00 GMT the FxWirePro's Hourly Strength Index of British Pound was highly bearish at -100.432, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -8.54242. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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