UK inflation in surprise fall, raises doubts over rate hike

19 April, 2018, 02:00 | Author: Franklin Nunez
  • Today's data also shows the employment rate has hit a new all time high as 55,000 extra people were in work

'Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget not appearing this March, thanks to its new autumn billing.

Analysts said Tuesday┬┤s data, showing also that average wages grew by 2.8 percent in the reporting period, increased the likelihood of an interest rate hike by the Bank of England next month.

The pound slumped following news that the Consumer Prices Index 12-month rate dropped to 2.5 percent in March as the official data throws into doubt the course of the Bank of England's monetary policy this year.

The rural month to month inflation rate registers -2.1 percent.

Inflation jumped in Britain after June 2016's vote to leave the European Union hammered the value of the pound and pushed up the cost of imports.

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"UK inflation fell unexpectedly to 2.5% in the year to March, its lowest level in a year, and down from 2.7% in February".

The Times warns that economists expressed "some concern that wages had not grown as fast as expected" - there had been predictions of a 3% increase.

In contrast, Pantheon Macroeconomics argues that inflation undershooting BoE forecasts 'suggests that investors have concluded too hastily that a May rate hike is a done deal.' It adds the decline in inflation reduces the BoE's need to raise rates a couple of times this year.

Inflation fell in March in a further boost to British households who have suffered a year of real wage falls, but the Bank of England's job may have become trickier, according to economists.

"Inflation looks to be falling back as predicted, but with wages picking up and unemployment still falling, it's possible this tightness in the labour market could eventually push inflation back up".

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Based on the ONS's preferred CPIH measure of inflation, which takes more housing costs into account than the CPI used by the BoE and government, pay growth edged ahead of inflation for the first time in nearly a year.

Though Mr Brettell said it remains more likely than not that interest rates will go up next month. It traded at US$1.4329 as of 10 am in London.

On balance, however, a quarter-point hike in the benchmark rate to 0.75 percent is still expected, not least because wage growth at 2.8 percent is outstripping price rises.

Paul Hollingsworth, senior United Kingdom economist at Capital Economics, said: "The fall-back in inflation in March probably won't prevent the MPC from hiking interest rates next month, although it perhaps makes it slightly less likely".

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