Unchanged CPI inflation of 1.7% in September was softer than either we or the consensus (1.8%) expected which might delay interest rate hikes following a Brexit deal and increase the chances of rate cuts if Brexit is delayed or there is a no deal.
Inflation surprisingly subdued in September
- Unchanged CPI inflation of 1.7% in September was softer than either we or the consensus (1.8%) expected which might delay interest rate hikes following a Brexit deal and increase the chances of rate cuts if Brexit is delayed or there is a no deal.
- Services and core inflation did rise in September as we had expected. But offsetting falls in transport and utility price inflation meant that overall CPI inflation stayed at 1.7%. Having dropped to 2.2% in August, services inflation returned to 2.5%. But falls in inflation in the transport category, from 1.4% to 0.6%, and housing and utility price inflation, from 2.4% to 2.0%, offset this. The fall in transport inflation was largely due to a drop in inflation in second-hand car prices, from -2.8% to -5.4%, consistent with consumers holding off big ticket purchases while Brexit uncertainty is at its highest.
- And while core inflation rose from 1.5% to 1.7%, it remains below July’s reading of 1.9%. (See Table 1.) That’s because core services inflation remains stubbornly subdued given strong growth in unit labour costs. (See Chart 1.) And core goods inflation is below import price inflation would imply.
- Moreover, input and output producer price inflation both fell, suggesting price pressures in the supply chain are weak too. The drops in input price inflation, from -0.9% to -2.8%, and output price inflation, from 1.7% to 1.2%, left both measures at their weakest rate since 2016.
- We think inflation has stayed low despite high labour costs because firms don’t have the confidence to increase their prices while demand is soft. If Brexit continues to be delayed, that will remain the case, and the Bank of England may have to cut interest rates.
- On the other hand, while we think a stronger pound would put downward pressure on inflation if there is a deal, stronger economic growth would give firms the confidence to finally pass higher costs onto customers. That’s why we suspect inflation would be around 2%, and that the Bank would eventually raise interest rates.
Chart 1: Pay Growth & Core Services Inflation
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com