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UK Inflation Continues its Downward Trend and is Unlikely to Pick Up Anytime soon

UK prices

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The Consumer Prices Index measure of inflation in the UK showed prices increased by 1.7% year-on-year in September, unchanged on the previous month but a shade below the market's expectation for a more robust reading of 1.9%, as a trend of steadily declining price pressures on the UK consumer extends.

According to the ONS, the softer-than-expect inflation reading was driven by downward pressures to the costs of motor fuels, second-hand cars, and electricity, gas and other fuels.

However, increases in the cost of furniture, household appliances, hotel overnight stays, and from recreation and culture items limited the decline in the prices consumers are paying.

The data confirms a steady trend of declining cost pressures in the UK, with prices moving steadily lower from the multi-year peak of 3.1% measured in November 2017.

CPI prices

The movement in prices will almost certainly only add to the perception that there is little reason for the Bank of England to raise interest rates anytime soon.

Yesterday's labour market data confirmed the jobs market is softening, and combined with the downward trend confirmed by today's inflation data, the Bank of England could in fact see scope for an interest rate cut as being their next move.

Such an outcome would likely weigh on Sterling's outlook, as currency's tend to fall when their central bank signals it is about to enter a rate cutting cycle.

Of course, it it is too soon to speculate on Bank of England policy moves, as it will be heavily Brexit dependent. But, strip out Brexit and we see the pressures to raise rates that were in place at the start of 2019 have now certainly evaporated.

And, cost prices are only likely to stay lower for longer, according to economists.

"Absent hard Brexit and a significant decline in Sterling inflation are likely to keep undershooting BoE’s 2% target. Meanwhile, the decelerating global demand could act as another deflationary impulse as Chinese goods blocked by tariffs in the US are likely to make their way towards Europe. BoE is likely to stay put for a while as, considering how fragile the UK economy is at the moment, a policy mistake would be disastrous," says Artur Baluszynski, Head of Research at Henderson Rowe.

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