Why UK inflation at 3% could be bad news for UK stocks

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Industrial output grew by 7.1 per cent in December, maintaining the recovery momentum on the back of robust performance by manufacturing as well as higher offtake of capital goods and non-durable consumer goods.

Inflation, including owner occupiers' housing costs, held steady in January, at 2.7 percent.

The index for all goods minus food and energy rose 0.3 percent, though economists had predicted a 0.2 percent increase.

"Markets seem primed for inflation risk right now, and so because of that there may be a bigger response" to the monthly reading, said Sam Coffin, an economist at UBS Securities LLC.

The annual retail inflation slightly eased in January to 5.07 per cent from the 17-month high hit in December, as food prices ebbed, data from the Ministry of Statistics showed on Monday.

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Industrial production, as represented by Index of Industrial Production (IIP) for the month of December 2017 stands at 130.3, which is lower than 8.8 percent in November 2017. Economists polled by Reuters had expected input prices to rise by 4.2 percent. Powell, speaking Tuesday at his ceremonial swearing-in, suggested that the central bank would push ahead with gradual interest-rate increases, and that officials "remain alert to any developing risks to financial stability".

"Apart from oil prices, monsoons will be the key factor for inflation".

"Ghosh also highlights that some inflation numbers in the first half of 2018 could print over 5.5% and this could be a source of negative surprise".

Over the same period, inflation, as measured by CPI was 2.7 per cent and was four per cent as measured by RPI.

The latest figures show a continuation in the squeeze on household budgets, as the rise in the cost of living remains higher than wage growth.

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"Somewhat counterintuitively, this may make it easier for the MPC to hike interest rates, as it helps to ease the squeeze on consumers' real incomes, the largest constraint on spending growth at present, which should help the economy to pick up a bit of pace".

As per the data released by the Central Statistics Office (CSO), the sequential slowdown in factory output was mainly on account of lower production in the manufacturing sector. Incoming data is also supportive of our hypothesis.

Similarly, indicating a revival in consumer demand, consumer durables grew 0.9 per cent compared to a decline of 5 per cent in December 2016. By contrast, many other countries are facing below-target inflation despite strong economic growth.

"Mackertich predicts IIP for December 2017 at 6.1% against prior period number of 8.40%".

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