Inflation expectations in the UK have hit the highest point since 2014, now the worry is will the actual inflation follow or will it just remain subdued as it did since 2014. The market as of now pricing that there would be a sharp rise in costs due to the big drop in sterling. 5-year break-even inflation rate has climbed to 2.7 percent. After bottoming in earlier this year, the expectations have jumped around 80 points. It is up 55 basis points this year, of which 40 basis points are after the UK referendum. UK consumer inflation has jumped up to 0.6 percent in July and according to the top forecast of the economists, it could hit as high as 3 percent by end of next year. If inflation does jump sharply and proves to be sticky, the central bank could be in a real dilemma on whether to ease to boost up the economy or beef up the rates to control inflation. We expect the central bank to act cautiously from here while maintaining on its easing path as exchange rate driven has historically proved to be transitory. The pound, which is largely blamed for the rise is currently trading at 1.31 against the dollar.

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