Small respite for household finances won’t last long
The fall in Consumer Price Inflation (CPI) in February took a few people by surprise given it had hovered around 3 per cent since November.
While a drop had been expected, CPI had not been expected to fall by as much as 0.3 per cent which in economic terms is substantial.
While CPI remains above the Bank of England’s 2 per cent target, it has fallen to its lowest level in seven months, and wages appear to be rising to meet it. This is good news.
And it’s why figures like this morning’s official Labour market statistics from the Office for National Statistics (ONS) are so closely watched.
Whether wages rose by 2.6 per cent or 2.7 per cent in the quarter between November and January was always going to be largely immaterial.
As long as average wages aren’t falling, pressure on household finances is easing.
The other thing to note about this fall in inflation is that it might suggest a quicker return to the Bank of England’s 2 per cent target than previously thought.
Rate hike
That may relieve some of the pressure for an interest rate hike.
At present, markets see the greatest probability of a rate hike in June.
Much of the Bank of England’s thinking will revolve around how far inflation has fallen by then and the relative strength of the economy.
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.
Economists had forecast GDP to expand by 0.4 per cent in the first quarter of 2018. But the collapse of Carillion, Toys R Us and Maplin, weak January retail sales, a downgrade to GDP in the fourth quarter of 2017 and snow have all contributed to a downward revision by most experts.
The economy is not now expected to have expanded much beyond 0.2 per cent in the three months to the end of March.
Meanwhile, if inflation is showing signs of moving back to target by itself, it may not need any encouragement.
Signs from the MPC
When the Monetary Policy Committee (MPC) meets on Thursday, it seems highly unlikely that it will agree to hike rates just yet.
But the City will be watching out for one or two dissenting voices on the Committee, which might give us a clue as to whether the Bank could do so later in the Spring.
It’s also worth remembering that there are lingering concerns about household debt levels and banks taking risks with their mortgage lending. Both represent arguments to delay raising rates.
Then again, continuing Brexit concerns may cause Bank governor, Mark Carney, to hike rates anyway just 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 that first quarter UK GDP data in April.
But a May or June interest rate hike still seems very likely. So whatever small respite households may get between now and then from falling inflation, it won’t last long.
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