UK inflation forecast for 2016 & 2017 - RBS

Ross Walker, Senior UK Economist at RBS, suggests that the lower starting point lowers their Core CPI projection for the UK in Year 1 with only a partial recovery in Year 2, reflecting sub-trend nominal GDP growth and wage inflation.

Key Quotes

“Higher crude oil prices provide some additional upside pressure on headline CPI over the next 12 months; a more marginal impact by end-2017.

Our FBTE inflation projection is raised by an average of 0.7pp throughout the remainder of 2016. This upside influence then diminishes steadily by late 2017.

CPI inflation is expected to remain <2% target until H2 2018 (vs BoE forecast of 2.07% in Q2 2018). RBS CPI forecast: 1.1% end-2016, 1.4% end-2017.

$ oil price assumptions raised, in line with futures prices: $51 per barrel at end-2016 (from $45) and $52.50 at end-2017 (from $48).

£/$ profile little altered vs month-ago forecasts. Starting point higher but ongoing £ depreciation risks from Brexit (a low of 1.38, subsequent rise to $1.45 by end-2017).

RBS BoE Bank Rate forecast unrevised: first hike in Q3 2017, with risks of a later first move. Bank Rate to reach 1.0% at end-2017 and 1.5% at end-2018.”