Unseasonal Factors Lift October Inflation To Three-month High

By Harry Daniels

LiveSquawk News

@harry.daniels71

 

18 November 2020 / 11.35 GMT

 

London - UK consumer price growth surprised markets with a larger-than-expected rise at the start of the fourth quarter, but analysts say inflation will remain subdued in the months ahead as the lockdown bites.

 

Annual headline inflation last month rose to 0.7% to exceed the expected growth rate and previous print of 0.5%. Core CPI was also elevated at 1.5% versus September’s 1.3% increase, with the latter also the market forecast.

 

The Office for National Statistics said, "The rate of inflation increased slightly as clothing prices grew, returning to their normal seasonal pattern after the disruption this year.”

 

Anecdotal evidence showed broad-based gains were led by clothing and footwear, food and beverages, furniture, and household goods. These were partially offset by falls in the cost of energy and holidays.

 

 

Regional restrictions affect specific products

Local lockdowns across the country have disrupted the usual spending habits of households, a trend reflected in the cost of particular goods. Citibank’s Christian Schulz said, “For clothing, interrupted seasonal patterns continue to have a notable effect – with seasonal increases usually observed in September pushed back into October. However, the pick-up here was particularly strong – in part, this might reflect weak pricing pressures earlier in the year associated with Covid-19.”

 

Rising costs were also seen further down the supply chain as factory gate prices advanced in October. The ONS said the headline rate of output inflation was -1.4% on the year to October, up from -1.7% in September.

 

Input prices rose to -1.3% in October from -2.2% in the previous month, representing a ninth consecutive month of negative rates. The stats office noted that input producer price inflation has been more volatile over time than output inflation.

 

Little likelihood of BoE reaction at the moment

Analysts said today’s release will not serve as a catalyst for increased central bank intervention at this point as the rise in prices is already factored into the forecasts of the Bank of England’s rate setting committee. Notably, the bank’s November Monetary Policy Report said, “CPI inflation is expected to remain at, or just above, 0.5% during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipate.”

 

Schulz noted, “We think inflation is likely to remain relatively subdued until April 2021. Significant increases in spare capacity are likely to have less of an impact on prices now than usual.”

 

Chris Hare, senior economist at HSBC, said, “Regarding the near-term outlook, the data for November (and possibly beyond) will be subject to greater uncertainty, with the renewed lockdown leading to the closure of non-essential retail, bars and restaurants.

 

“In terms of underlying fundamentals, and notwithstanding some pockets of resilience, UK inflation is clearly low. Negative energy price base effects and the VAT ‘holiday’ for the hospitality sector are exerting downward pressure. While those factors should prove temporary, and ‘drop out’ next year, we also think that, on balance, weak aggregate demand is also acting as a disinflationary headwind.”

 

He added that flagging consumer price growth sides with monetary policy doves. “Given that, and even following the GBP150bln boost to its quantitative easing programme announced this month, we see risks to the BoE's policy outlook as tilted towards further loosening.”

 

 

Citi/ONS