Interest rate pressure declines
Interest rate pressure declines as the headline rate of price inflation, the Consumer Prices Index (CPI), has fallen to 2.5% for the year to March.
The fall from 2.7% the previous month means inflation has fallen to a one-year low.
It comes at an interesting time, with rising wage inflation suggesting the pay squeeze is coming to an end.
Wages are currently rising at 2.8%, creating a positive gap between average earnings and average price inflation.
Lower price inflation also reduces the likelihood of an interest rate rise in May, as previously expected.
According to Bank of England governor Mark Carney, an interest rate rise next month should not be viewed as a foregone conclusion.
Carney explained that there would be more interest rate rises in the next few years, but recent economic data has been softer than expected and price inflation has fallen faster than Bank policymakers forecast back in February.
So why has price inflation slipped back?
According to the Office for National Statistics:
The largest downward contribution to the change in the rate between February 2018 and March 2018 came from prices for clothing and footwear rising by less than they did a year ago, with the effect coming mainly from a range of items of women’s clothing.
Price movements for alcoholic drinks and tobacco also made a downward contribution to the change in the rate; this in part reflects changes to the Budget cycle that were introduced in 2017, with tax changes for tobacco being announced in November 2017 instead of March 2018.
One consequence of this softer price inflation is a fall in Pound Sterling, which up until this week had been performing strongly, reaching a recent high against the US Dollar.
Falling Pound Sterling is another indication that interest rates are less likely to rise in May.
TUC General Secretary Frances O’Grady said:
Wages are still worth less than before the financial crisis, leaving many working people struggling to get by. A hike in interest rates is the last thing they need, and the fall in inflation shows the Bank of England should hold off.
What people really need is higher wages, not higher interest rates. It’s time for a new deal for working people that makes wage growth a much higher priority.
The government should start by funding a proper pay rise for every public sector worker this year. And they must raise the minimum wage to £10 an hour as quickly as possible, so that more families can get by without getting into debt.
Not everyone thinks that interest rates should remain on hold next month.
Commenting on the latest CPI inflation data, NIESR’s Head of UK macroeconomic forecasting, Amit Kara said:
Inflation has dropped to its lowest level in a year and by more than we expected, yet we believe that the MPC should remain on a gentle path of normalisation with a 25bp Bank Rate increase in May.
It will be interesting to see what decision the Bank of England’s Monetary Policy Committee takes when they meet in May.