UK Markets Look to Release of CPI Inflation Data

By: Lloyds_TSB

In the UK, the October consumer price indices are released and the first rise in the headline annual rate of CPI inflation for eight months is expected (to 1.6% from 1.1% in September). The range of the market consensus for today’s CPI reading is unusually large at 1% to 1.7%, underscoring the point that the near-term picture for UK inflation is particularly uncertain in the midst of a high volatility period. We expect this feature to persist during the early part of 2010, when we expect the standard rate of VAT to be restored to 17½% and the effects of the exchange rate and other energy base effects to cause prices to fluctuate markedly.

That said, BoE Governor King emphasised at the recent QIR press conference that the MPC must “look through” the volatility when setting monetary policy. The MPC therefore seems predisposed to remain focused on the large negative output gap that has developed during the recession, which should place downward pressure on inflation over the medium term. In other words, “high” near-term inflation readings are not going to unduly concern the MPC.

It’s a quiet day for data in the Eurozone, though 3 ECB members (including President Trichet) are to speak today. In the US, there are also 3 Fed speakers scheduled. Markets will be listening to remarks on both sides of the Atlantic for any further colour on how the unwinding of unconventional policy measures could play out. Finally, US producer price inflation is expected to have jumped by three percentage points to -1.8% y/y in October, the highest since February.

Lloyds TSB Corporate Markets Economic Research

For more information: Emile Abu-Shakra Manager, Media Relations Lloyds TSB Group Media Relations Tel 020 7356 1878 http://www.lloydstsbcorporatemarkets.com/

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