I remain convinced that most developed markets' economies exhibit much less inflation pressures than is generally believed. Core inflation rates will fall further and nominal growth rates will remain muted for a prolonged period of time. However, I am seriously worried about the developments in the UK. I previously argued that I see the most pronounced risk of an inflationary outcome for the UK (see for example: Revisiting the UK: Not much good news dated August 18) and highlighted the disappointing development of UK inflation relative to the US and the Eurozone. Today, the August CPI data were published. Unfortunately, they did nothing to change my downbeat assessment as inflation once again overshot consensus and core inflation failed to moderate.
True, yoy inflation fell further, to 1.6% from 1.8% in July. However, this was once again above consensus expectations (which were looking for a 1.4% reading). Furthermore, compared to the US and the Eurozone, the UK's inflation moderation during the current year remains much more muted (last US and Eurozone numbers are for July):
Therefore, I can only repeat my conclusion reached in mid-August:
"I remain seriously worried about an inflationary outcome in the UK (in contrast to the US and the Eurozone) and suggest to underweight the UK from an asset allocation perspective. UK Gilts risk underperforming significantly vs. the US and Eurozone counterparts over the medium term and yields are likely to rise over the next quarters."