Tue Nov 14 03:30:00 CST 2017

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

A smaller than expected 0.1 percent monthly increase in the October CPI left the UK's annual inflation rate steady at September's multi-year high of 3.0 percent.

The main boost to the change in the annual inflation rate came from food and non-alcoholic drink where prices rose a monthly 0.4 percent compared with a 0.5 percent fall over the same period a year ago. Recreation and culture (0.5 percent after 0.2 percent) also had a positive impact, mainly reflecting package holidays (0.4 percent after minus 0.4 percent). However, motor fuels (minus 0.4 percent after 2.3 percent) subtracted as did owner occupiers' housing costs (0.0 percent after 0.4 percent) and, to a lesser extent, furniture and household goods.

As a result, the core CPI was only flat at its September level which, in turn, saw its yearly rate hold steady at 2.7 percent. The CPIH, the measure preferred by the ONS but not the policymakers, edged 0.1 percent firmer on the month for a 2.8 percent annual rate, similarly unchanged from last time.

The October inflation data should come as a pleasant surprise to the BoE its November Quarterly Inflation Report estimated the rate at 3.2 percent. It also means that Governor Carney will not (yet) be forced to write to the Chancellor of the Exchequer explaining why the 2 percent target level has been overshot by more than 1 percentage point. The last MPC meeting suggested that the next hike in official interest rates would not be delivered for some time. Today's inflation update increases the likelihood of a 0.5 percent Bank Rate until possibly well into 2018.

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.

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.