UK Producer Prices are set to shrink at an annual pace of -0.1% in September, putting in the fourth consecutive month in negative territory. The outcome foreshadows continued downward pressure on consumer prices (the benchmark inflation gauge) as falling wholesale costs translate into a lower final price tag. This may give the Bank of England scope to expand its asset-purchasing scheme and possibly lower the interest rate it pays on banks’ reserve deposits amid concerns that rising unemployment will continue to weigh on wages, keeping inflation below the 2% target level for longer than two years. The BOE opted to hold off on policy changes this month but many observers (including former MPC policymaker David Blanchflower) suggest a dovish shift will coincide with the release of the bank’s updated inflation forecast next month.
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