UK Inflation Rate

westernpromise

Masomnia wrote: »

Inflation will obviously rise because of the fall in the £

But that was a once-off hit in late June 2016. After a year it drops out again because the £ versus the $ has been at about $1.25 and stayed there. So I'd expect to see any rise in inflation to end by June and start to reverse immediately after so that we end the year with inflation falling. I reckon we are looking at a peak rate of maybe 2% or 2.1% and a year end figure back at 1.5% or so.

davomcdave

westernpromise wrote: »

But that was a once-off hit in late June 2016. After a year it drops out again because the £ versus the $ has been at about $1.25 and stayed there. So I'd expect to see any rise in inflation to end by June and start to reverse immediately after so that we end the year with inflation falling. I reckon we are looking at a peak rate of maybe 2% or 2.1% and a year end figure back at 1.5% or so.

That would be true if prices instantly responded to changes in FX rates but if you look at the world around you that's not what happens. Firstly companies have hedges in places that normally run out for 6-12 months so they can simply rely on the profit from the hedge to balance out the loss on operations.

Secondly companies don't operate as monopolies. If the price of President brie goes up then people buy the stuff from Somerset instead so companies try to hold down prices as long as they can.

As a result it takes 18-24 months for a big FX change such as we've seen in Sterling to feed through to prices in the first order.

Then there are second order effects. Unemployment is low and apparently we're about to cut off the flow of immigrants. If inflation is rising and unemployment is low then people can simply move jobs to get a pay rise and maintain their standard of living, heck I've moved more than once for a pay rise.

Companies that pay badly have to pony up more money for staff and the pay rises are going to be paid in lower profits in part but also in higher prices. That means more inflation and on it goes......perhaps.

Thrugelmir

Masomnia wrote: »

So what's going to change prices so significantly between December 2016 and December 2017?

Manufacturers raise prices. So far much of the fall in the exchange rate has been absorbed in their margins. Or was hedged ahead.

michaels

Whenever inflation is rising the consensus always seems to be for it to rise less quickly than it does and top out lower.

Personally I can see it going north of 4% this year and 5% in the first half of next year.

However, to the disappointment of many, I can't see the BoE raising rates unless pay rises start to increase to compensate. This is not entirely impossible because I suspect the supply of EU labour will start to contract (probably already has with the uncertainty and lower value of GBP earnings in 'home' countries) and thus the UK labour market conditions (record employment, low unemployment) will come into play and may see wages rising.

Thrugelmir

michaels wrote: »

Whenever inflation is rising the consensus always seems to be for it to rise less quickly than it does and top out lower.

Personally I can see it going north of 4% this year and 5% in the first half of next year.

However, to the disappointment of many, I can't see the BoE raising rates unless pay rises start to increase to compensate. This is not entirely impossible because I suspect the supply of EU labour will start to contract (probably already had with the uncertainty and lower value of GBP earnings in 'home' countries) and thus the UK labour market conditions (record employment, low unemployment) will come into play and may see wages rising.

If the US does raise the Fed interest rate next month. With possibly 2 further rises this year. Then it gives other countries the opportunity to follow suit.

davomcdave

michaels wrote: »

Whenever inflation is rising the consensus always seems to be for it to rise less quickly than it does and top out lower.

Personally I can see it going north of 4% this year and 5% in the first half of next year.

However, to the disappointment of many, I can't see the BoE raising rates unless pay rises start to increase to compensate. This is not entirely impossible because I suspect the supply of EU labour will start to contract (probably already had with the uncertainty and lower value of GBP earnings in 'home' countries) and thus the UK labour market conditions (record employment, low unemployment) will come into play and may see wages rising.

This is the key bit, I agree. That or further big falls in the pound.

gfplux

With the pound trading in the range 1.15 to 1.18 against the Euro for the last month I suspect we may see a further fall when PM May triggers A50 at the end of March unless the market trends it lower during March.
Any guesses where it will be on April 1st.
I think, but hope not, closer 1.10. This will add to that inflationary pressure.
We certainly live in interesting times.

Thrugelmir

gfplux wrote: »

I think, but hope not, closer 1.10. This will add to that inflationary pressure.

Maybe so. However it may also deter people from buying imported goods from Europe (and elsewhere). Also spending less when they go on holiday. For every action there'll be a reaction elsewhere.

On the plus side. UK money invested overseas will continue to generate even better returns.

Times are interesting. As the race to the bottom continues. Who is going to crack first?

BobQ

And then there is the impact of Quantitative Easing and the potential for rising interest rates and consequential inflation.....

michaels

gfplux wrote: »

With the pound trading in the range 1.15 to 1.18 against the Euro for the last month I suspect we may see a further fall when PM May triggers A50 at the end of March unless the market trends it lower during March.
Any guesses where it will be on April 1st.
I think, but hope not, closer 1.10. This will add to that inflationary pressure.
We certainly live in interesting times.

If you are certain that triggering a50 will lead to a fall in the pound against the euro I suggest you remortgage your house and short sterling and retire in 6 weeks.

Like all markets the fx markets price in the knowns, it is unexpected events that lead to sharp price adjustments.