UK inflation expected to rise to 1.4% at end-2016 - RBS

Research Team at RBS, suggests that their inflation forecasts for UK are little altered vs last month: a rise to 1.4% at end-2016 and a peak of 2.5% in Q3 2017, falling below target in Q2 2018.

Key Quotes

“The rise is led by import components, reflecting sterling's depreciation - initially food & energy but spreading more widely over the next 6-12 months. The key forecasting issue is the extent to which firms' pricing behaviour and the wage-setting process responds to the currency-induced price shock. We expect underlying disinflationary influences to dominate against the backdrop of persistent sub-trend Nominal GDP and household disposable income growth.

RPI inflation is forecast to peak at 3.4% in Q3 2017; RPIX at 3.8% (reflecting the impact of mortgage interest rate cuts and falling house price inflation. Our BoE Bank rate forecast has been revised slightly: a final 15bp cut to 0.1% in November 2016 (previously September 2016).

Sterling profile raised vs previous f/cast, reflecting higher starting point. Deprecation to $1.28 over the next 6 mths or so, then a modest rebound to $1.35 by mid-2018.

Brent crude oil price assumptions barely altered vs month-ago forecasts, in line with futures market pricing: $50 at end-2016, $53 at end-2017 and $55 at end-2018.”