Inflation: Impact has been visible globally – Lloyds Bank

Research Team at Lloyds Bank points out that the impact on inflation trends has been visible globally. 

Key Quotes

“Following a benign start to the year, Brent crude oil prices turned down in early March, falling below $51. Sentiment was driven lower by signs that US crude oil stocks have been accumulating more quickly than typical seasonal builds and that the resolve of major producers to deliver agreed production cuts may be wavering. If sustained, current price levels of around $52 per barrel – while still up relative to those prevailing in early 2016 – would limit the upward push to inflation dynamics globally. The bulk of these energy-related base effects are expected to run their course during 2017 Q1, however.”

“Headline inflation in the euro area rose to 2.0% y/y on February’s ‘flash’ estimate, the fastest since January 2013, with energy continuing to drive the latest increase. However, underlying ‘core’ inflation – outside of energy and food prices – was flat at 0.9% y/y, in line with its average since 2013. The durability of the euro area inflation upturn beyond 2017 remains contingent on stronger readings for ‘core’ inflation that have hitherto failed to react to ongoing ECB stimulus.”

“US headline inflation has also been tracking higher but now appears to be approaching a local peak. Data for February saw CPI inflation reach 2.7% y/y, the highest since March 2012. Outside of the influences of food and energy costs, ‘core’ inflation also remains considerably higher than in the euro area, with the 2.2% y/y reading in February in line with the average observed since 2016. That ongoing relative ‘core’ resilience has underpinned higher relative levels of US market-implied inflation expectations against those for the euro area, even as readings have recently dipped a little globally. UK inflation expectations notably remain stretched. The post-referendum weakness of the currency, alongside the ongoing resilience of UK economic activity as monetary policy remains highly accommodative, both pose UK-specific upside inflation risks.”

“To be sure, sterling weakness already in train – a 19% fall since the 2015 peak on a trade-weighted basis – will aid the recovery of headline CPI inflation to the BoE’s 2% target and beyond. After January’s reading of 1.8% y/y, inflation is likely to push sharply higher over the course of 2017, clearing the 2% target in February. While non-energy import costs will henceforth be the dominant driver, increases in domestic gas and electricity tariffs will also play a part. Weakening underlying cost pressures in the second half of 2017 should provide some offset as growth in the economy slows modestly and reduced labour market tightness limits the overshoot relative to target. Still, compared with the BoE’s February projections – where CPI peaks at 2.8% in 2018 Q2 – our larger projected overshoot, peaking at 3.3%, comes earlier and proves more difficult for the economy to shake off.”