It Ought to Be All Uphill From Here for U.K. Inflation

Tuesday's expected sub-zero reading may be the trough

A higher U.K. inflation rate may be just around the corner. No, really. 

Data due out on Tuesday will probably show prices fell for a second month in October. That's good news for consumers because lower food and energy prices have depressed the cost of living and bolstered spending power.

For policy makers at an inflation-targeting central bank, it's not so great. While the annual rate of consumer-price growth has been below the Bank of England's 2 percent target for 21 months and has hovered around zero for most of this year, bank officials and city economists remain adamant increases are on the way.

They say it can't get any worse because, after the report for last month, so-called "base effects'' such as the slump in oil, drop out of calculations and will naturally stoke prices. 

"Inflation should pick up quite quickly beyond October as the effects of lower fuel prices begin to fall out of the annual comparison and domestic-cost pressures edge up,'' said Dan Hanson, an economist at Bloomberg Intelligence in London. "There's a risk to that outlook if the strong pound acts as a bigger drag than expected or if the weakness in wage growth evident in the most recent labor report persists.''

For officials debating the first interest-rate increase in more than eight years, the path of inflation is everything. And the new projections they published last week show consumer prices shaking off their current funk, averaging annual growth of 0.1 percent this quarter before accelerating to 1.25 percent next year and 2.06 percent in the final three months of 2017. 

That sounds like a reassuring outlook, unless you think there's a risk it might get revised lower. Earlier this month the central bank lowered its inflation outlook in its quarterly forecasts: 

Back to Tuesday: prices probably slipped 0.1 percent from a year earlier in October, according to a Bloomberg survey, the same rate of decline as the previous month. Seven of the 34 economists in the poll predict a sharper fall of 0.2 percent.

"People won't be that shocked by a second month of negative inflation, there's an uptick in December priced in,'' said Sam Hill, an economist at RBC Capital Markets in London. "A negative year-on-year number by itself won't unduly concern the Monetary Policy Committee.''

Quite so. For Bank of England officials it's all about the future path, and the only way is up. They say.

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