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14 Apr 2015
UK core inflation declines to 1.0% YoY – Danske
FXStreet (Barcelona) - Analyst at Danske Bank, Mikael Olai Milhøj, reviews the UK inflation data release, and notes that the low core inflation could feed into wage formation, which would it difficult for the BoE to reach the 2.0% inflation target.
Key Quotes
“UK CPI inflation was unchanged at 0.0% y/y in March (Danske Bank: 0.0% y/y, consensus: 0.0% y/y).”
“Against our expectations, core inflation declined further to 1.0% y/y in March down from 1.2% y/y in February. Although the underlying inflation pressure is subdued, the positive core inflation rate means that there are very few deflationary tendencies in the economy at the moment.”
“That said, the low core inflation could feed into wage formation through second-round effects. If so, this will make it more difficult for the Bank of England to reach its CPI inflation target of 2.0%.”
“The decline in core inflation was due to a further decline in non-energy industrial goods inflation, which fell from -0.6% y/y in February to -1.0% in March, possibly due to the appreciation of sterling. Services inflation was unchanged at 2.4% y/y, which however is still low from a historical perspective.”
“We expect CPI inflation to remain low until the end of the year and beginning of next year when the base effects from the declines in energy and food prices fall out.”
“This is in line with the Bank of England’s own expectations for inflation, implying that today’s figures should not change significantly the individual views of the members of the Monetary Policy Committee (MPC).”
“That said, the minutes from the MPC’s March meeting revealed that the committee has become more concerned about the appreciation of sterling, as the strong currency puts downward pressure on both headline and core inflation.”
“As core inflation is low and sterling is strong, the MPC can be more patient with the first Bank Rate hike.”
Key Quotes
“UK CPI inflation was unchanged at 0.0% y/y in March (Danske Bank: 0.0% y/y, consensus: 0.0% y/y).”
“Against our expectations, core inflation declined further to 1.0% y/y in March down from 1.2% y/y in February. Although the underlying inflation pressure is subdued, the positive core inflation rate means that there are very few deflationary tendencies in the economy at the moment.”
“That said, the low core inflation could feed into wage formation through second-round effects. If so, this will make it more difficult for the Bank of England to reach its CPI inflation target of 2.0%.”
“The decline in core inflation was due to a further decline in non-energy industrial goods inflation, which fell from -0.6% y/y in February to -1.0% in March, possibly due to the appreciation of sterling. Services inflation was unchanged at 2.4% y/y, which however is still low from a historical perspective.”
“We expect CPI inflation to remain low until the end of the year and beginning of next year when the base effects from the declines in energy and food prices fall out.”
“This is in line with the Bank of England’s own expectations for inflation, implying that today’s figures should not change significantly the individual views of the members of the Monetary Policy Committee (MPC).”
“That said, the minutes from the MPC’s March meeting revealed that the committee has become more concerned about the appreciation of sterling, as the strong currency puts downward pressure on both headline and core inflation.”
“As core inflation is low and sterling is strong, the MPC can be more patient with the first Bank Rate hike.”