UK CPI inflation tumbled to just 0.5% in December, the weakest reading since May 2000. For now, we stick to our forecast that the BoE will start to hike rates in June 2015, but the weak CPI data certainly increases the risk that the first rate hike will come later.
CPI came in flat in December reducing the year-on-year figure from 1.0% in November to 0.5%, the weakest since May 2000 and below the 0.7% consensus estimate. Core CPI inflation rose from 1.2% in November to 1.3% y/y.
Inflation was dragged down in December by falling motor fuel, electricity and gas prices as tumbling oil prices are feeding through to consumers.
Inflation below 1% requires BoE Governor Carney to write a letter to the chancellor (Finance Minister) George Osborne explaining why inflation is deviating so far from the target. Carney recently stated that he is confident that inflation below 1% will only be “temporary” and that the inflation will return to the 2% target by the end of the BoE’s forecast period, without any additional action.
Moreover, the labour market continues to strengthen and real wages have started to pick up.
Hence for now we stick to our forecast that the BoE will start to hike rates in June 2015. However, today’s weak CPI data certainly increases the risk that the first rate hike will come later.