Monday, 23 April, 2018

Welcome drop in inflation as Brexit impact fades

UK consumer price Welcome drop in inflation as Brexit impact fades
Scott Davis | 21 March, 2018, 08:18

Official data published on Tuesday showed consumer prices rose by an annual 2.7 percent last month, the weakest increase since July of a year ago.

Prices grew by 2.7 per cent in February - that's down from 3 per cent in January and 3.1 per cent in November when inflation reached its highest level since March 2012.

Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy, was unchanged at 4.1 percent year-on-year in February, while on a month-on-month basis it quickened to 1.1 percent from 0.2 percent previously.

"This does make any increase in interest rates during the next few months less likely", he said.

The largest downward contribution was transport and food prices, which rose by less than a year ago while prices for accommodation also dropped.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said investors should expect a significant change of course for the Bank of England: "In theory that relieves some of the pressure on the Bank of England to raise interest rates, though falling inflation is very much in their script, so these latest figures don't really alter what we can expect from the Bank in the coming months".

"The UK recovery is now almost nine years old, and yet our official interest rate is exactly where it was nine years ago".

Sterling's slide since the Brexit vote has ratcheted up the pressure on household spending power, climbing from 0.6% shortly after the European Union referendum result to a near six-year high of 3.1% in November 2017.




Despite the fall in inflation, many households are still feeling pressure in their budgets.

Phil Gooding, the ONS head of CPI said a small fall in petrol prices alongside food prices rising more slowly than past year helped to bring down the rate in February.

The Brexit-driven fall in the pound pushed up inflation over the last 18 months, but those effects are now slowing, and prices are rising more slowly.

Today's fall will ease the pressure on squeezed households and substantially reduces the likelihood of another interest rate rise.

"We are increasing the National Living Wage which is already helping the lowest earners see their pay rise by nearly 7 per cent above inflation". The BoE expects pay to rise faster than prices.

"As a result, we still think that the MPC will raise interest rates... in May", they added.

"This fallback in inflation therefore provides little reason for the Bank of England to hold back from gradually raising interest rates".

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