GB: CPI


Tue Sep 12 03:30:00 CDT 2017

Consensus Actual Previous
Month over Month 0.5% 0.6% -0.1%
Year over Year 2.8% 2.9% 2.6%

Highlights
Inflation accelerated more sharply than expected in August. A 0.6 percent monthly increase in consumer prices was enough to boost the annual inflation rate by 0.3 percentage points to 2.9 percent, matching its highest outturn since April 2012.

The main upward pressure on the change in the yearly rate came from clothing and footwear where prices rose a partly seasonal 2.4 percent on the month compared with just 1.0 percent in the same period in 2016. Recreation and culture (0.1 percent after minus 0.3 percent) also contributed positively as did, to a lesser extent, restaurants and hotels. Elsewhere transport had little overall impact but this masked a boost from petrol prices (up 1.8 percent/litre after a 1.8 percent/litre decline) that was offset by weaker air fares (10.9 percent after 14.4 percent).

The core CPI also increased 0.6 percent versus July which saw its yearly rate climb from 2.4 percent to 2.7 percent. This matched its highest reading since December 2011. At the same time, the inflation measure preferred by the ONS (CPIH) advanced a marginally smaller 0.5 percent for a 2.7 percent annual rate, up just a tick from last time and equalling its recent May peak.

The August results mean that CPI inflation has now been above the BoE's 2 percent target for seven consecutive months. The outcome also exceeded the 2.7 percent mark estimated in the Bank's latest Quarterly Inflation Report. This probably all but guarantees that the two hawks who wanted to raise interest rates in August (McCafferty and Saunders) will renew their tightening call on Thursday. The acceleration will probably not be enough to sway all the other MPC members but the vote now could be rather closer than seemed likely at the start of the week.

Definition
The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

Description
The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.