GB: CPI


Tue Dec 12 03:30:00 CST 2017

Consensus Actual Previous
Month over Month 0.2% 0.3% 0.1%
Year over Year 3.0% 3.1% 3.0%

Highlights
Consumer prices rose a slightly larger than expected 0.3 percent on the month in November. This put the annual inflation rate at 3.1 percent, up just a tick from September/October but high enough to require BoE Governor Carney to write a letter to Chancellor of the Exchequer Hammond explaining the reason for the overshoot of the 2 percent target.

In terms of the yearly rate, the main contribution to the modest acceleration came from transport (mainly air fares) where prices rose 0.1 percent on the month compared with a 0.3 percent decline over the same period a year ago. Recreation and culture also had a small positive impact but this was largely offset by miscellaneous goods and services which recorded a 0.1 percent dip versus a 0.2 percent increase in November 2016.

Consequently, the core CPI matched the headline monthly advance although this was only sufficient to hold the underlying annual rate steady at 2.7 percent. The CPIH, the measure preferred by the ONS, also rose a monthly 0.3 percent which similarly left its annual rate flat at 2.8 percent.

Overall CPI inflation is now running at its strongest mark since March 2012. November's outturn was also marginally firmer than the BoE expected in its November Quarterly Inflation Report. However, with the core rate flat, today's update is unlikely to have any real impact on the outcome of Thursday's BoE MPC meeting. Interest rates were hiked only last month and most, if not all, the Committee's policymakers will probably want to see how the economy reacts before tightening the monetary screw any further.

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.