July consumer price index (CPI) inflation data, published on 16 August, showed a small uptick of the headline inflation rate to 0.6% year-on-year, the highest since 20 months.
The core rate, excluding volatile items such as energy prices and food, remained unchanged at 1.3% year-on-year. The July inflation readings had been widely anticipated, as it was the first set of inflation data following the Brexit vote on 23 June.
While at first sight a higher inflation reading due to the clobbered pound sterling is a logical Brexit-fallout effect, it is yet far too early to assess the full extent of the inflationary effect, also due to the lagging characteristic of inflation.
The Bank of England presented an inflation forecast with head-line CPI averaging 2.2% in 2017, while our model shows a more modest rise to an average of 1.7%.
Much is still to happen with regard to the implementation of the Brexit and uncertainties remain.
We therefore see current CPI forecasts rather as an indication for the trend over the next months. In anticipation of Tuesday data, the pound sterling had been sliding a new three-year low vs. the euro.
We expect further gradual pound weakness ahead, given the Bank of England’s policy response and negative Brexit effects on the UK’s current account.
David A. Meier is economist at Julius Baer