UK inflation surges as Carney rate-cut decision looms closer

[LONDON] UK inflation accelerated to the fastest pace in almost two years in September, part of an upward trend that's set to continue as the weaker pound pushes up import costs.

The 1 per cent pace of consumer-price growth exceeded the 0.9 per cent forecast by economists and marks the highest since November 2014. The core rate of inflation also reached a two-year high, while a gauge of factory costs signaled more increases are ahead.

The pound's 18 per cent decline since the UK voted to quit the European Union is forecast to fuel faster inflation, even pushing it above the Bank of England's 2 per cent target. Still, Governor Mark Carney has said he'll tolerate faster price gains in his efforts to support the economy, and a majority of economists in Bloomberg's monthly survey said he'll cut the benchmark rate on Nov 3.

"After years of undershooting, he must allow a little bit of overshooting," former Bank of England foreign exchange manager John Nugee said in a Bloomberg Television interview with Francine Lacqua. "He cannot push too hard on inflation, it risks upsetting the fragile recovery."

While the statistics office said it's not yet seeing explicit evidence of a currency effect in consumer-price changes, weaker sterling is slowly filtering through the economy, with factories seeing their costs surge.

Input prices rose an annual 7.2 per cent in September, with crude oil up 14.2 per cent, the most since 2012. Factory-gate prices rose the fastest in three years. The increase in producer price inflation over recent months can be "partly attributed to the changes in the sterling exchange rate," the statistics office said.

The BOE has already pumped stimulus into the economy since the Brexit vote, cutting interest rates in August for the first time in seven years and restarting quantitative easing.

Economists' forecasts for another rate reduction are increasingly at odds with the money markets, which show traders see just a 5 per cent probability of a reduction next month, down from 17 per cent after the BOE's September policy meeting.

Adding to the complexity for the BOE is a better-than-expected economic backdrop since June, which could prompt officials to raise their growth forecasts. Staff have already lifted their third-quarter GDP estimate, and policy makers Michael Saunders and Kristin Forbes have said that the outlook may not be as weak as the central bank predicted in August.

Chris Hare, an economist at Investec in London, said that despite a "firming in the inflation outlook" because of the weaker pound and surprising growth indicators, the MPC will look through sterling effects and guard against lingering Brexit-related risks to activity.

Mr Hare sees a cut in November, a call made after much "soul searching," though others disagree, including Kallum Pickering at Berenberg.

"The bigger-than-expected drop in sterling has done a lot of the work for the Bank of England," Mr Pickering said. "With the resilient economic performance since the Brexit vote, we expect the BOE to stay on hold for now."

BLOOMBERG