Consumer inflation in December rose at a weaker pace by 3.0% y/y while core inflation also gained slowly by 2.5% y/y. We also noticed the producer price slipping significantly to 4.9% y/y in December from 7.3% y/y in November. The softer inflation data suggests the post-June 2016 Brexit vote that resulted in a record slump in sterling that fuelled import costs may have started to ease. This falls in line with our view that the impact from the lower pound will ease from December 2017 onwards. Hence, the squeeze on living cost which curbed disposable income and had a wider negative knock-on effect on the economy in 2017 will soften in 2018. The slowing of inflation is expected to remove some pressure on the Bank of England (BoE) to raise rates in 2018 after lifting the policy rate by 25 basis points (bps) for the first time in a decade in November 2017 to 0.50%. Still, we maintain the view that the central bank would raise rates twice between 2018 and 2019. Although the rush to raise rates is slightly lower now, we feel it remains too early to conclude whether the latest inflation data is the start of any longer term reduction because the largest downward contribution to the inflation rate in December came from air fares.

• Consumer inflation in December rose 3.0% y/y from 3.1% y/y in November following weaker transport prices, up 3.8% y/y in December from 4.1% y/y in November as well as recreational & culture, and restaurant & hotels, up 2.7% y/y and 3.1 y/y from 3.1% y/y and 3.2% y/y respectively in November.

• At the same time, core inflation which excludes energy, food, alcohol, and tobacco rose at a slower pace by 2.5% y/y in December from 2.7% y/y in November. We also noticed the producer price slipping significantly to 4.9% y/y in December from 7.3% y/y in November. .

• Softer inflation data suggests the post-June 2016 Brexit vote that resulted in a record slump in sterling that fuelled import costs may have started to ease. This falls in line with our view that the impact from the lower pound will ease from December 2017 onwards. Hence, the squeeze on living cost which curbed disposable income and had a wider negative knock-on effect on the economy in 2017 will soften in 2018.

• The slowing of inflation is expected to remove some pressure on the Bank of England (BoE) to raise rates in 2018 after lifting the policy rate by 25 basis points (bps) for the first time in a decade in November 2017 to 0.50%.

• Still, we maintain the view that the central bank would raise rates two times between 2018 and 2019. Although the rush to raise rates is slightly lower now, we feel it remains too early to conclude whether the latest inflation data is the start of any longer term reduction because the largest downward contribution to the inflation rate in December came from air fares.

Source: AmInvest Research - 17 Jan 2018