UK: Unexpected dip in inflation - ING

For a second month running, UK core inflation has disappointed market expectations and will come as a blow to some Bank of England hawks, according to James Smith, Developed Markets Economist at ING.

Key Quotes

“Admittedly some of the latest unexpected fall in core CPI to 2.3% can be explained away by quirks. For instance, airfares actually fell in March despite the early Easter – a seasonal pick-up in travel costs was a key reason why many analysts, ourselves included, had looked for a temporary pick-up in inflation today. The fact that the government made no changes to alcohol/tobacco taxation in March (given the move to a November budget) also reportedly weighed on the data.”

“But fundamentally, core inflation is falling because prices have now virtually adjusted to the post-Brexit plunge in the pound.”

“At face value, this takes some of the pressure off the Bank of England to tighten policy over coming months. But, wage growth is central to the Bank’s thought process when considering inflationary pressures, and the recent data has been surprisingly strong.”

“That means a May rate hike still looks like an increasingly done deal, but what comes thereafter is far less clear. Policymakers have appeared to talk up the prospects of a second rate hike later in the year, so a November move certainly shouldn’t be ruled out. But Brexit still has the potential to get quite noisy around the time of October’s EU summit, while the economy is still struggling to get up to speed.”