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Our views 20 March 2024

UK sees small downside surprise in inflation; building the case for rate cuts

5 min read

Year-on-year headline inflation fell 0.6 percentage points to 3.4% in February (consensus 3.5%).

Annual core inflation was also a touch weaker than expected at 4.5% (after 5.1%) and services inflation fell too (though not as much as expected - consensus expectations were for a fall to 6.0% from 6.5% and it fell to 6.1%). The Retail Price Index measure of inflation came in a touch higher than expected at 4.5% after 4.9% (consensus: 4.4%).

The expected fall in inflation in February (at least on my forecasts) was going to be more about base effects in core inflation and it looks like that has played a role; the month-on-month increase in core CPI was more ‘normal’ compared to last year. Energy was a key upward contributor to the move in year-on-year CPI inflation in February (transport fuel). Offsetting this though, there were large downside contributions to inflation in February from food and restaurants/cafes (apparently largely driven by alcohol). What I’d call core goods inflation (non-energy industrial goods), slowed from 2.7% year-on-year to 1.9%. Most of the main categories of prices contributed negatively to the move in CPI inflation this month though.

In terms of key indicators of underlying inflation pressure/domestically driven inflation, things were also more encouraging than last month. Services inflation clearly remains at very high levels but, except for housing services (where rental inflation picked up), the main categories of services inflation all slowed at least a bit.

Many of the major central banks at this stage seem to want more confidence/more evidence that inflation is on track to sustainably hit inflation targets before starting to cut rates. As far as it goes, today’s data should be modestly encouraging from a Bank of England (BoE) perspective (headline CPI was a tenth below the staff forecast from February’s Monetary Policy Report and services inflation was in line with the staff forecast). Headline inflation looks likely to fall to around 2% (a bit below) over April-June (partly on cuts in energy bills), but that doesn’t mean it will stay there. Last week’s unemployment and pay growth data were consistent with more loosening in the labour market, but annual pay growth is still strong and services inflation (on today’s figures) is clearly still at high levels. For now, I’m still assuming the first BoE rate cut comes in the second half of the year, but with risks skewed towards an earlier move and more so than before today’s data.


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