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    UK dips back into deflation in September; pound slumps

    UK inflation slipped back into negative territory in September, as the 12-month CPI fell to -0.1% from 0.0% the prior month. Consensus estimates were for CPI to stay unchanged.  The month-on-month rate also fell by 0.1%. The core rate, which excludes energy, food, alcohol and tobacco, was unchanged at 1.0% year-on-year, against expectations that it would pick up to 1.1%.

    The biggest contributor to the change in the 12-month rate was a smaller-than-expected rise in the price of clothing and footwear. Food prices continued to fall over the 12-month period and were down by 2.5% in September. Transportations costs also continued to decline due to lower fuel prices, which fell by 14.9% over the year. Meanwhile, the biggest price increases were recorded in the health and restaurants & hotels sectors.

    Also released today were the latest producer prices. Input costs jumped by a larger-than-expected 0.6% month-on-month in September but were still down 13.3% over the year. Output prices was in-line with estimates, falling by 0.1% on the month and by 1.8% annually.

    Inflation has been running between 0.1% and -0.1% since March and is likely to stay in that region until the end of the year when the effects of last year’s decline in fuel prices is expected to drop out of the CPI calculations. The Bank of England had previously signalled that the turn of the year would be when the decision to raise interest rates would come into sharper focus. But expectations have since shifted to the second quarter of 2016, with some analysts even projecting a rate rise in the second half of next year.

    A delay in the US Federal Reserve raising its funds rate is also thought to be an influencing factor in the Bank of England’s timing. But BoE Governor Mark Carney played down the Fed dependency saying that the Fed’s decision was “not decisive” for the BoE. Speaking at an IMF event in Peru, Carney said that wage pressures in the UK were building up and that growth is likely to accelerate again after a slower third quarter.

    The pound fell sharply against major currencies after the weak inflation numbers. It had rallied ahead of the data on corporate M&A activity. Sterling was trading just above the 1.53 level against the dollar before rallying to 1.5387 ahead of the data. But it plummeted to 1.5230 after the data disappointed. The euro saw similar moves, falling to 0.7392 pounds before surging to 0.7475 after the data.

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