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    UK inflation stuck at -0.1% but stronger core rate sends pound higher

    Inflation in the United Kingdom remained in negative territory in October and was largely within estimates, figures out today showed. Annual CPI was unchanged from the previous month at -0.1% in October and in-line with estimates. But core CPI, which excludes energy, food, alcohol and tobacco prices, rose to the highest since July to 1.1% year-on-year, up from 1.0% in September and against forecasts that it would stay unchanged.

    The headline rate of inflation in the UK has been stuck between 0.1 and -0.1% since February as lower oil and import prices have put downward pressure on high street and fuel prices despite robust domestic consumer demand.

    The biggest price pressure came from clothing and footwear, with prices jumping 2.0% in October from the previous month as there were less discounts on offer compared to this time last year. The education sector had the largest downward effect, since although prices rose by 3.6% over the month, this represented a smaller increase in tuition fees than a year ago.

    Food, beverages and tobacco prices fell by 0.4% from the previous month. Fuel prices were also down, declining by 0.9% during the month and by 1.9% over the year, while the overall transport sector saw prices falling by 1% month-on-month.

    Also out today were producer prices, which came in mixed. Output prices fell by 1.3% over the past 12 months, which was in line with estimates. However, input prices continued to fall sharply and were weaker than expected, coming in at -12.1%, versus estimates of -12.0%.

    The muted outlook for UK inflation has pushed back the timing of an interest rate rise by the Bank of England. In its latest quarterly report, the Bank of England’s projections showed that inflation would only rise slightly above its 2% target in two years’ time if interest rates remained at the current historical low of 0.50%.

    However, most economists expect for the Bank of England to move in the second half of 2016. The effects of the drop in commodity prices and sterling’s appreciation should start to drop out of the CPI calculations towards the end of the year, and wage growth is expected to pick up next year as the slack in the UK labor market diminishes.

    The pound jumped against the dollar in response to the stronger core CPI figure. It rose from a session low of 1.5154 dollars to peak at 1.5216 before falling back to around 1.52 dollars in mid-European trading. The euro meanwhile continued its three-day descent against the pound and came close to breaching the 0.70 handle before firming slightly to 0.7017 pounds.

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