We’ve gone from deflation to inflation in the space of a month, but the change is little more than a rounding error. Seasonal factors surrounding the timing of the Easter holiday were at work in last month’s figures – CPI inflation was pushed down by cheaper air fares relative to last year. Now those factors have dropped out of the calculation we are back where we started.
The overall economic picture hasn’t materially changed; inflation is being kept low by cheaper fuel and a supermarket price war pushing food costs down, but both these factors are moderating and can be expected to gradually have a lesser impact on CPI. Bank of England governor Mark Carney said in the Bank’s annual report on Monday that inflation would soon rebound – however, given that the Bank sets monetary policy to meet its inflation target in the medium term, it should not come as too much of a shock to hear its governor stating that inflation will return towards the target. We will gain a further insight into thinking at the Bank when the latest policy meeting minutes are released tomorrow.
Core inflation, which strips out volatile components such as food and energy prices, rose slightly to 0.9 percent. This shows that even accounting for the dramatic fall and partial rebound of the oil price, inflationary pressures in the economy remain weak. Consequently there is still little pressure on policymakers to raise interest rates in the short term, with the first rise pencilled in for the first half of next year at the earliest. Focus now shifts to tomorrow’s labour market statistics, released at 9.30am. The unemployment rate is expected to hold steady at 5.5 percent, but average wages growth (excluding bonuses) is expected to jump from 2.2 percent to 2.5 percent. Having spent most of the aftermath of the financial crisis in the doldrums, the last few months has seen a sustained pick-up in the rate of wage growth. If this trend accelerates it could support the case for higher interest rates sooner rather than later.