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Consumer Price Inflation fall is a relief

Jacob Deppe
uk economy

The fall in Consumer Price Inflation (CPI) in February will bring some welcome relief to hard pressed households, particularly as it is a bigger fall than was expected. Contributor Jacob Deppe, Head of Trading – Infinox.

It could also suggest a quicker return to the Bank of England’s 2 percent target and may relieve some of the pressure for an interest rate hike. Wednesday’s unemployment and average wage data will be hotly anticipated. If wage rises show signs of picking up, we could at least find ourselves at a break even point in terms of living costs.

If economic growth in the first quarter surprises everyone next month by being stronger than expected, the Bank could well hike rates in May. But present expectations for GDP are lower than at the start of the year. So the real target remains inflation itself which, if it is beginning to move back to target, may not need encouragement to do so from monetary policy.

While the Monetary Policy Committee (MPC) meets on Thursday it seems highly unlikely that it will agree to hike rates just yet. But there may well be one or two dissenting voices on the Committee calling for a hike this month, which might give us a clue as to whether the Bank could do so later in the Spring.

There are also simmering concerns about household debt levels and banks taking risks with their mortgage lending that could lead the Bank to hike interest rates anyway. Not to mention continuing Brexit concerns which may cause Bank governor Mark Carney to hike rates to give himself the wiggle room to cut them later if he needs to.

Ultimately, we remain in a holding pattern until the release of first quarter UK GDP data in April. Once that data has been released we may have a better idea of what the MPC is likely to do. “In the meantime, households will continue to have to show patience and perseverance at least for now.

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