U.K. headline inflation likely to fall gradually towards BoE’s 2 pct target in months ahead

The February inflation report of the U.K. indicated annual CPI falling to 2.7 percent in February from 3 percent a month before. The outturn was a bit softer than the 2.8 percent anticipated. The decline was in wider sense because of the waning effect of earlier U.K. currency softness and an associated deceleration in import price inflation. More specifically, the softness was focused in food, transport, and hotel and restaurant costs. The core inflation also dropped a bit more sharply than expected, from 2.7 percent to 2.4 percent.

But in the months ahead, the headline inflation is likely to fall back only gradually towards the Bank of England’s 2 percent target, noted Lloyds Bank in a research report. In line with the earlier inflation reports, domestic price pressures, stemming from rising wages and tightening capacity constraints, building to counter the unwinding impacts of sterling’s post-EU referendum decline.

The acceleration in annual wage growth to 2.8 percent in last week’s labor market report implies this impact is currently in motion. In all, these forces are expected to combine to temper the pace at which inflation falls back towards its target over the next three years, with the risk that the overshoot proves larger and more protracted than expected, added Lloyds Bank.

At 18:00 GMT the FxWirePro's Hourly Strength Index of British Pound was slightly bullish at 64.4524, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -140.88. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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