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News Analysis: Surprise fall in British inflation may only be blip in upward trajectory

Updated: 11 16 , 2016 14:53
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LONDON, Nov. 15 -- The British inflation rate took a surprise fall in October, dropping from 1.0 percent in September to 0.9 percent,the Office for National Statistics released. But it is a fall which economists believe does not herald a continued reduction.

Experts have forecast an inevitable rise in British Consumer Price Inflation (CPI) on the back of the 12 percent fall in sterling against other currencies since Britain voted to leave the European Union(EU) in June, which will feed through to higher prices in Britain's domestic market.

For economic forecasters this is a blip in an expected upward move for British inflation.

"We retain our view that the broader trend in UK inflation is upwards, even if the sterling effect remains elusive for now," said HSBC economist Elizabeth Martins in a briefing note.

Both clothing and the drinks component of the recreation figures have a history of volatility and could reverse next month, said Martins.

The unexpected fall may counter a lack of confidence in Britain's economic prospects expressed in market sentiment.

The Bloomberg implied probability of a rise in the bank rate from the 0.25 percent it hit in August -- an immediate central bank attempt to guard against any post-Brexit economic downturn -- was at 40 percent on Monday, but had fallen to 29 percent on Tuesday after the CPI figures.

Scott Bowman, British economist at economics think-tank Capital Economics, concurred with Martins: "The fall... was a temporary stumble along the upward path that should see inflation breach its 2 percent target in 2017. This will eat into real incomes, but other supportive factors should ensure consumer spending doesn't slow too sharply."

Those factors are important for continued economic growth, as it is consumer spending which is currently driving GDPgrowth, as households shrug off uncertainty about Brexit and carry on spending.

If the income and confidence of households is hit, economic growth will slow.

"Support from low interest rates, and a probable easing of the fiscal squeeze in next week's Autumn Statement (the economic plan to be unveiled by the government), should ensure that spending growth doesn't slow too sharply," said Bowman.

But it's not just inflation figures which are likely to change because of the Brexit vote, elsewhere in the British economy the vote's influence is already being felt.

On Tuesday, statistics from the London business real estate market revealed that uncertainty in the wake of the Brexit vote is having an impact on investment.

The Deloitte Real Estate's Crane Survey showed a year-on-year fall of 42 percent in office building activity.

A total of 40 new office developments covering 2.8 million square feet had begun over the past six months, a decline from the record 4.8 million square feet under development a year earlier.

Occupancy of new offices had also declined, with lettings down 37 percent from a year ago.

The survey attributed this to subdued lettings among financial services businesses, a sector which is currently unsure about the Brexit negotiation outcome.

"There is no doubt that Brexit has been a component of a general cautiousness among occupiers, but we are seeing with occupiers that these are quite uncertain times generally," said Chris Lewis, Deloitte's head of occupier advisory.

But perhaps the most telling verdict on the fall in inflation figures and the likely continued effect of the Brexit vote on the economy is from Mark Carney, the governor of the Bank of England (BOE), who was by chance giving evidence to a committee in parliament on Tuesday.

When asked what he thought of the fall, he replied: "I wouldn't take a steer from the October numbers. Unfortunately inflation is going to go up; that's the consequence of a very large move in the exchange rate."

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