James Smith, Developed Markets Economist at ING, explains that at 2.4%, UK inflation has continued to tumble more quickly than expected, despite a fairly punchy 1.2% increase in petrol prices, and the largest ever April rise in soft drink cost on the back of the newly introduced ‘sugar tax’.
Key Quotes
“Admittedly some of the latest declines came from the notorious airfares effect, following the early Easter.”
“But we suspect at least some of this latest fall is sterling related, and we expect core inflation to hit 2% next month as the rate of pass-through from the pound’s post-Brexit plunge continues to fade.”
“In principle, this takes some of the heat off the Bank of England to hike rates again in the near-term – although it’s worth remembering policymakers are still focussed squarely on wage growth as a measure of underlying inflation.”
“But when it comes to the prospect of a summer rate hike, it all comes down to whether the activity data show sufficient signs of recovery before August. Our feeling is the Bank is inclined to hike rates assuming the data shows some signs of a bounce-back. That said, a lot still depends on the high street where lower demand, rising wage costs and higher business rates are causing severe difficulties for retailers.”
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