We see UK December CPI coming in at 1.5% y/y, unchanged from the previous month. This would match a three-year low and consolidate the drop from 2%-plus levels seen during the middle of last year. That drop largely resulted from falling gas and electricity prices, following a reduction to the energy price cap. Such a result would be a notch above the Bank of England's (BoE) projections.
Notably, the core rate held steady at 1.7% y/y in November, and we think it will remain there this time around too, albeit with risks posed by swings in airfares. Other downside risks stem from a possible deeper correction back in clothing cost inflation, but with upside risks from fuel-related base effects.
Much of the recent underlying weakness has been a reflection of weak (and in some cases even-more negative) clothing inflation, with the collective softness prior to June and July testifying to the struggles on the high street as weak demand forced retailers to offer deep discounts. While clothing inflation jumped back up in October, it subsequently slowed in November, which brings into question whether further positive readings are sustainable.
Additionally, it will be interesting to see if the more pronounced softness in the PPI numbers from October and November is repeated in the numbers to be released alongside CPI data.
House price data will be more notable, however, as this series is possibly becoming a more pertinent factor for the BoE as it wrestles with the downside risks that have emerged for the near-term outlook (for both prices and growth). In October, the annual rate halved to a seven-year low of 0.7% y/y, echoing survey data suggesting a slide back toward zero.