UK inflation expectations remain relatively stretched – Lloyds Bank

In view of the analysts at Lloyds Bank, UK inflation expectations meanwhile remain relatively stretched against a backdrop of UK-specific upside inflation risks, partly driven by the post-referendum weakness of the currency.

Key Quotes

“To be sure, sterling weakness already in train – an 18% fall since the 2015 peak on a trade-weighted basis – has aided the recovery of headline CPI inflation to the BoE’s 2% target and beyond. After holding at 2.3% y/y in March, inflation is likely to push sharply higher over the course of 2017. While non-energy import costs – including of food – will henceforth be the dominant driver, hikes in domestic gas and electricity tariffs will also play a part.”

“Softer underlying cost pressures in the second half of 2017 should provide some offset as growth in the economy slows modestly and reduced labour market tightness limits the overshoot relative to target. Still, compared with the BoE’s February projections – where CPI peaks at 2.8% in 2018 Q2 – our larger projected overshoot, peaking at 3.3%, comes earlier and proves more difficult for the economy to shake off.”