Has inflation peaked?

Consumer Prices Index (CPI) inflation stalled in March at 2.3 per cent – unchanged from February – according to the latest reading from the Office for National Statistics.

‘It is no surprise UK CPI remained flat in March as neither energy prices nor sterling moved significantly over the month. Indeed, inflation has probably peaked for now,’ says Viktor Nossek, director of research at WisdomTree.

He explains that there are three key risks ahead if this is the case. One is that the pound significantly devalues from current levels. ‘With Brexit uncertainty already priced in, however, we would need to see a catastrophic breakdown in the EU27 trade talks for sterling to fall much further from here.’

The second is the oil price breaching $60 a barrel. Bullishness abounded after the Opec production deal, but the oil price has barely moved. ‘Every time the price moves higher, US shale producers raise output. Unless this constant counterbalance is disrupted, the oil price will remain broadly static.’

The third is that we see the non-energy components of UK CPI rise. However, this would require higher household consumption, and unless employment outstrips expectations and wages grow, it appears doubtful, argues Nossek.

He adds it is worth remembering that CPI in the US is only just creeping up, despite wages increasing in response to a stronger labour market. This is ‘good’ inflation.

In contrast, in the UK, we have ‘bad’ inflation, driven by a weaker pound and higher energy costs. ‘Bigger bills will hit households’ propensity to spend. Without a major shift in either sterling or oil, higher UK inflation looks unsustainable,’ concludes Nossek.

Ian Kernohan, economist at Royal London, argues, however, that sterling’s fall last year is still having an impact on the inflation figures, and also that a late Easter will push some April prices up compared with last year.

The later date of Easter this year will have held back prices in March, thanks to the lower air fares, he says. ‘However, while the impact of rising oil prices last year is now fading, the full impact of sterling’s devaluation is still feeding through.  We would expect the air fare effect to reverse next month, and CPI to move higher, further above the 2 per cent target.’

Ruth Gregory, UK Economist at Capital Economics provides an even more pessimistic view for the prospect of continuing price rises for consumers. She says March’s unchanged UK CPI inflation rate represents just a temporary pause in an upward trend which will probably take inflation to just over 3 per cent before the end of the year.

Nor is there likely to be any action taken to counter it in the near future. Gregory concludes: ‘Given the uncertainty around the Brexit negotiations and the fact that there has been little sign of building domestic cost pressures, we continue to think that the MPC will hold off until the middle of next year before raising rates.’

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