The UK CPI inflation rate has dipped below zero (-0.1% y/y). While technically this means deflation has arrived, the Bank of England has announced it will be looking through the “impact of past falls in commodity prices” on the basis that it expects them to be short-lived. That said, core inflation has weakened too, reflecting subdued growth in domestic costs, particularly wages. While there is no reason to suspect that a deflationary mindset is settling on the UK economy, the Bank will be wary of downside risks to inflation. “Given the possibility that political uncertainty associated with the forthcoming EU referendum could impact investment in the UK and the potential for the July budget to bring forward austerity, the Bank is unlikely to be a rush to tighten policy. We expect steady rates until May 2016.” said Rabobank
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