Rate rise expectations cool as inflation falls back to 13 month low

The chances of an interest rate rise this year have receded after official data published today by the Bank of England showed that Consumer Price Inflation extended its downward trend in April to be at a 13-month low of 2.4 per cent - its lowest level since March 2017.

The data comes as surprising but very welcome news for consumers after the consensus had been for inflation to be unchanged at 2.5 per cent.

The fall was partly due to the timing of Easter, which meant a seasonal rise in air fares was not included in April this year.

The pound fell about half a cent against the dollar after the figures were released before rising to $1.3368.

Analysts now question the prospect of any rate rises this year.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “Inflation was brought down in April by a marked year-on-year drop in air fares reflecting the earlier Easter in 2018 compared to 2017. There was also a downward impact from clothing and footwear (mainly due to men’s clothing) and food & drink prices.

“There was an upward impact on inflation in April from higher fuel prices and also from communication costs. Core inflation dipped to 2.1 per cent in April from 2.3 per cent in March and 2.4 per cent in February.”

Mr Archer added: “We expect inflation to hover around 2.5 per cent in the near term as higher oil prices have an upward impact. Petrol prices have risen to their highest level since September 2014 in May. This is expected to be countered by the impact of past sterling weakness continuing to fade.

“If oil prices move higher still or even stay at these levels for a prolonged period then the inflation risks will be magnified. However, we currently do not expect oil prices to go much higher and expect them to be back down close to $70/barrel by the end of the year.

“The upside risk to inflation from higher oil and commodity prices was evident in annual producer input price inflation rising back up to 5.3 per cent in April from 4.4 per cent in March and 3.8 per cent in April. It had previously trended down to February’s low from 5.6 per cent at the end of 2017 and a peak of 19.9 per cent in January 2017. However, annual producer output price inflation was stable at an upwardly revised 2.7 per cent in April, which is the lowest since November 2016.

“We suspect that domestic price pressures will firm only slowly over the coming months amid no more than middle of the road UK growth. Regular earnings growth is picking up only gradually despite the tight labour market, and we expect this to remain the case. Firms remain keen to limit their total costs in a challenging and uncertain environment. Fragile consumer confidence will likely deter workers from pushing hard for increased pay rises despite recent higher inflation and a tight labour market.

“As a result, we expect consumer price inflation to be down to 2.2 per cent by the end of 2018. We expect inflation to hover close to 2 per cent in 2019.”