Food inflation slows to 3%, led by meat and chocolate; prices of computer game downloads drop sharply; economists say benign inflation data reduces chances of June rate hike
James Smith, developed markets economist at ING, said:
Yes, UK inflation is set to rise again later this year, having dipped below 3% in April. But the data should reassure the Bank of England that last year’s food price spike hasn’t triggered a wave of second-round effects across the inflation basket. Like yesterday’s jobs numbers, the data questions the need for aggressive rate hikes.
We continue to think markets are overestimating the Bank of England’s willingness to tighten policy, at current levels of energy prices. Investors are pricing between two and three rate rises by next spring.
Sadly, this improvement is set to be short lived as the impact from the Middle East conflict continues to build, with motor fuel prices rising at the fastest pace since the Ukraine war.
Inflation is set to remain elevated, as higher energy and commodity prices spread across supply chains and household energy bills rise again. As attention intensifies on the cost of living, it is important that policy action is targeted in the right place. With business margins under persistent pressure, price rises reflect the reality of rising costs for business. Addressing the drivers of those costs — particularly regulation, taxation and energy — will be key to limiting further price rises.
Inflation coming in softer than expected today will further take the pressure off the Bank of England to hike rates over the next few meetings. But we are most certainly not out of the woods in terms of the impact of the Iran conflict on inflation. Ironically, this is probably the month inflation would have been back at the 2% target were it not for the Iran war.
Instead, headline inflation will pick up again in coming months, especially after the next energy price cap re-set in July. So as inflation climbs back towards 3.5% later this year, the question of interest rate hikes will remain pressing. But on balance, we think the weakness of the economy, and the labour market in particular, will stay the Bank’s hand, with rates remaining on hold even as inflation pressures remain elevated.
So far the Bank of England have rightly resisted calls for higher rates. But with a fragile jobs market, weak pay growth and lower than expected inflation, rate cuts should now be on the agenda again.
Continue reading…Food inflation slows to 3%, led by meat and chocolate; prices of computer game downloads drop sharply; economists say benign inflation data reduces chances of June rate hikeJames Smith, developed markets economist at ING, said:Yes, UK inflation is set to rise again later this year, having dipped below 3% in April. But the data should reassure the Bank of England that last year’s food price spike hasn’t triggered a wave of second-round effects across the inflation basket. Like yesterday’s jobs numbers, the data questions the need for aggressive rate hikes.We continue to think markets are overestimating the Bank of England’s willingness to tighten policy, at current levels of energy prices. Investors are pricing between two and three rate rises by next spring.Sadly, this improvement is set to be short lived as the impact from the Middle East conflict continues to build, with motor fuel prices rising at the fastest pace since the Ukraine war.Inflation is set to remain elevated, as higher energy and commodity prices spread across supply chains and household energy bills rise again. As attention intensifies on the cost of living, it is important that policy action is targeted in the right place. With business margins under persistent pressure, price rises reflect the reality of rising costs for business. Addressing the drivers of those costs — particularly regulation, taxation and energy — will be key to limiting further price rises.Inflation coming in softer than expected today will further take the pressure off the Bank of England to hike rates over the next few meetings. But we are most certainly not out of the woods in terms of the impact of the Iran conflict on inflation. Ironically, this is probably the month inflation would have been back at the 2% target were it not for the Iran war.Instead, headline inflation will pick up again in coming months, especially after the next energy price cap re-set in July. So as inflation climbs back towards 3.5% later this year, the question of interest rate hikes will remain pressing. But on balance, we think the weakness of the economy, and the labour market in particular, will stay the Bank’s hand, with rates remaining on hold even as inflation pressures remain elevated.So far the Bank of England have rightly resisted calls for higher rates. But with a fragile jobs market, weak pay growth and lower than expected inflation, rate cuts should now be on the agenda again. Continue reading…