U.K. consumer price inflation likely to move through BoE’s 2 pct target in Q2 2017

U.K.’s inflation outlook would be mainly driven by the post-referendum currency depreciation. In October, the nation’s headline inflation and core inflation surprisingly slowed down. The annual consumer price inflation fell to 0.9 percent, whereas the core inflation, which excludes energy, food, tobacco and alcohol, fell to a year-on-year pace of 1.2 percent.

Inflation in the U.K. decelerated in spite of a rise in energy prices on an annual basis. The main downward surprise was driven mainly by the subdued clothing and footwear prices. However, as the effect appears to be greatly connected to timing, with shifts in high street discounting betraying usual seasonal patterns, the broad narrative continues to stay intact, noted Lloyds Bank in a research note.

Even if sterling has depreciated recently, there is a question of when the further upward pressure on costs feed through, with imported goods likely to see notable price gains.

“We expect CPI inflation to reach 1.2 percent by the end of 2016 and move through the BoE’s 2 percent target in Q2 2017”, added Lloyds Bank.

However, lower underlying cost pressures are expected to provide some offset, thanks to a decelerating economy and the resulting reduction in the tightness in labor market. This might help curb the inflation’s overshoot relative to target. In all, the overshoot of the 2 percent inflation target is expected to be slightly larger in magnitude.