Disinflation Spreads to the U.K.

Italian consumer inflation remains in the negative territory (see chart), as the nation's economy struggles to grow. But Italy is not unique - the rest of the world is catching the Eurozone's disinflationary flu. China's latest CPI print for example came in below that of the US - something we haven't seen until recently (see chart).

The UK is also facing weakening inflation. Prices continue to fall at the wholesale level, with British firms still having little pricing power (see chart). It's difficult to raise prices when everything is marked down across the Channel. For the UK's consumers, inflation is now at the lowest level since the Great Recession - for both the headline and the core CPI.

It's difficult to see how the Bank of England can begin raising rates in such an environment - even with the housing market remaining strong (see chart). With oil prices collapsing, inflation is only going to move lower. Just as the case with the Fed (see post), the forward rates markets are pricing in an increasing delay in liftoff. The BoE is on hold at least until next summer as disinflation spreads to the UK.

Markets' expectations of the UK overnight rate (source: BoE)

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