The latest inflation figures from the UK showed that consumer prices fell for the second consecutive month on an annual basis in April. The declines in consumer prices came on the back of the exchange rate and consumer prices fell quicker than the median estimates.
Data released by the UK’s Office for national statistics (ONS) showed that the annual inflation rate rose at a pace of 2.4% in April. This was a slower pace of increase compared to the 2.5% inflation registered in March. The median estimates showed that the inflation rate would remain unchanged at 2.5%.
The core inflation rate which is measured after removing the volatile food and energy prices were seen rising at a slower pace of 2.1% in April, compared to 2.3% increase in March.
ONS’s head of inflation, Mike Hardie said that lower airfares made the biggest downside contribution to consumer prices due to the timing of Easter. He however said that this was partially offset by the rise in fuel prices.
Price of soft drinks increased sharply according to the official data. This was attributed to the introduction of the newly formed Sugar tax. Still retailers noted that the full effects of the tax hike were not yet passed on to consumers.
The British sterling fell sharply on the news released, losing 0.6% to fall to 1.3347 against the U.S. dollar. This was the lowest level against the USD since December last year. Meanwhile government bond prices rallied with the yields falling.
The current weakness in inflation, even though still above the BoE’s inflation target suggests that with the Brexit concerns still remaining, the markets are not expecting to see another rate hike from the BoE for the remainder of this year.
However, a BoE policymaker, Vlieghe in a recent meeting with the Treasury Committee in the Parliament said that rates could rise 25 – 50 basis points every year over the next three years. This was viewed as an aggressive path of rate hikes compared to the market expectations.
The Bank of England Governor, Mark Carney who was also speaking with the Treasury Committee said that it was appropriate wait and assess for more economic data following the weak statistics from the economic growth and inflation in the first quarter.
The Bank of England had hiked interest rates in November 2017. This came as the UK’s consumer prices rose 3.1% on an annualized basis in November. The exchange rate was seen falling sharply after the Brexit decision and saw an effect with import prices rising strongly.
The decline in consumer prices for April suggested that the economy was not generating enough price pressures to offset the effects of a weaker pound sterling.
The decline in the consumer prices earlier was attributed to factors such as weak weather and weak economic growth, which put to question the BoE’s rate hike plans for the remainder of this year.
The UK’s economy was seen rising at a pace of 0.1% in the first quarter. This was a significant slowdown compared to the previous quarter’s growth. However, the BoE officials had brushed aside this weakness and expressed optimism that growth might have been stronger than expected.
While the inflation report might have been disappointing a separate report covering the retail sales was seen to be fairly better. Data from the Confederation of British Industry showed last week that retail sales grew at a moderate pace in May.
The weakness was attributed to the retailers experiencing higher cost of inflation and weaker spending due to a slowdown in wage growth. Although recent data showed that real wages were finally outpacing inflation, it is expected that retail sales could rise in the coming months.
