UK CPI

Today we see the results of December’s CPI. Many economists are going for a lower number.

According to MPC member Spencer Dale, the main reason why growth in 2011 didn’t match up to the MPC’s original forecast, was due to weak household consumption. The sector in highly influenced by high job insecurity, austerity measures and turmoil in the Euro Zone. A fall in CPI should put a foundation under consumption as real incomes should hold more firmly.

However, the minutes of the December MPC meeting suggested that whilst there is a strong agreement that inflation will drop in early 2012 as the VAT hike falls out of the index, there is some doubt about the stickiness in inflation in late 2012.

The decline in the value of the GBP vs. the USD suggests that the high energy and commodity prices could be stubborn on UK inflation. This means that it could be a while before the 2% target is reached and real wages edge higher.

A lower CPI today will further the case for more QE. If it does drop, depending on how much will influence further QE projections. With the likely case of more economist joining the ‘February / March’ camp at 50 to 75bln.

So with some hope more QE will at least provide support to confidence and have a knock on effect to other assets.

It is said that further QE is being priced into the market. This should be negative for Sterling, but bear in mind that since the MPC announced more QE in October EUR/GBP has fallen nearly 5%. This is because the announcement was over overwhelmed by the 25bps cut from the ECB in November and December.