Inflation report could show a BOE unwilling to revise unemployment lower

• Inflation pressures slipping throughout the G4
• UK CPI falls to 2.2%, core to 1.7% – lowest in 4 years
• UK unemployment due at 09.30, BOE inflation report at 10.30

Inflation, or the lack thereof, has been a problem for advanced economies for a while now. Recent data however has brought the issue into sharper focus. Japan has struggled under a deflationary shadow for nigh on 20 years with little respite, while Europeans are worried anew by record lows in inflation last month. The Federal Reserve has held back on a normalisation of its asset purchase program given fears over the level of the PCE basket, and yesterday it was the UK’s turn.

UK CPI has not fallen by as much as elsewhere but has shown us what falls in oil markets can do to a CPI basket. On a year-on-year comparison, inflation was 2.2% higher compared to 2.5% expected and 2.7% previously; a large decline. Despite recent chatter over utility rises, falls in energy prices across world markets have seen a nice decline in monthly price increases.

The ECB chair, Mario Draghi, pinned the recent European inflationary slip on the oil markets; crude has slipped dramatically in recent months as global growth has slowed and geopolitical tensions have subsided in the Middle East. The fall in the core rate of inflation – without the volatile energy and food components – shows that the lack of wage push inflation is finally having an effect on prices; without rising pay packets, prices will have to come lower.

Sterling was hit hard by the number as the market looked at three things; interest rates are likely to remain lower for longer if inflation poses even less of a concern to forward guidance, more QE could be used if the Bank believes that inflation has fallen too much and, with a lower pound, how will that affect trade flows – as exports become cheaper.

Further sterling losses could be seen today if the Bank of England’s inflation report shows a central bank that is unwilling to revise its unemployment projections to show an improving jobs picture. In its August inflation report, the Bank predicted that it would take until Q3 2016 for the unemployment rate to return to 7%, and subsequently for rates to rise. There is obvious divergence between the Bank and the markets with OIS swaps viewing Q2 2015 as the time when rates will start to drive higher with short sterling markets still looking for Q3 2014.

If Carney decides to smack those expectations today, it will likely be on the basis of productivity. If the recent strong growth news from the UK is as a result of improving productivity then the impact on jobs will be little; businesses are doing better by making those employees already on the payroll work harder. Until that slows then unemployment will remain comparatively high.

We receive September’s unemployment release at 09.30 GMT, while the inflation report is due at 10.30.

News from the Eurozone should emphasise further weakness today. Industrial production is expected to have fallen 0.3% in September and remain flat compared to this time last year, while Spanish CPI should show minimal inflation.

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