UK was back in deflation in September as CPI inflation declined to -0.1% y/y from 0.0% y/y in August (Danske Bank: 0.0% y/y, consensus: 0.0%). Core inflation was unchanged at 1.0% y/y in September (Danske Bank: 1.1% y/y, consensus: 1.1% y/y).
We have for some time argued that the Bank of England (BoE)'s focus has shifted back to inflation in the wake of lower oil prices and a stronger GBP. Although we expected an unchanged print in September, we have on several occasions mentioned that it could not be ruled out that inflation could turn negative again. This is one major reason why the BoE has been relatively dovish recently, as we believe it wants to see CPI inflation move higher before hiking. Unless we see a further drop in commodity prices, we think inflation hit the bottom in September, as we estimate CPI inflation will move slightly higher in the coming months before picking up close to 1% in January 2016 when the base effects from the drop in oil prices in H2 14 begin to drop out.
The expected pick-up in inflation early next year should reduce concerns among MPC members and thus we continue to believe the BoE will hike in Q1 16, probably in February . The tighter labour market and accelerating wage growth has put pressure on the BoE.
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