UK CPI: A temporary fall

Consumer Price Index (CPI) inflation in the UK was widely expected to fall in April but fell a bit more than consensus. CPI fell to 2.8% year-on-year in April from 3.3% (consensus: 3.0% year-on-year). Core CPI fell to 2.5% from 3.1%, a touch lower than expected (consensus: 2.6%). Retail Price Index (RPI) fell more than expected to 3.0% year-on-year after 4.1% year-on-year.

Looking into the details, the main downward movements in April came from household bills (a chunk of which should prove temporary) and Easter timing effects, rather than reflecting underlying weaker inflation trends: 

• The CPI fall reflects lower household electricity and gas prices (partly because wholesale prices fell in the period Ofgem used to calculate the price cap for April; the higher post-Middle East prices will be captured in July).
• The fall also reflects so-called ‘negative base effects’ from regulated/administered prices, where very large rises last year (in water bills – sewerage collection costs – and vehicle excise duty) weren’t repeated this year.
• Easter timing effects also seem to have helped CPI inflation fall. Last year, the sample period used for package holidays and air fares included a holiday period, but didn’t this year (this year, the sample period was over a week after Easter).
• Computer games also contributed to the down-move in ‘recreation and culture’ but in the past the Office for National Statistics (ONS) has flagged that movements here will reflect changes in the composition of bestseller charts.
   

Food inflation fell in April after rising in March. Food inflation is likely to remain of particular interest to the Bank of England (BoE), as research suggests food prices play a key role in shaping inflation expectations. The fall is welcome, but higher fertiliser and fuel costs, and availability problems, are likely to mean higher global food prices with a lag.

Services inflation fell more than expected to 3.2% in April (consensus: 3.5% year-on-year) after 4.5% year-on-year. While on the surface, that suddenly makes services inflation look a lot less ‘sticky’, some (though not all) of the fall will reflect those Easter timing effects, and some will presumably also reflect negative base effects from sewerage collection costs. In other words, the figures aren’t as reassuring concerning underlying inflation pressure as they might look.

In July in particular, household/electricity bills are likely to rise reflecting the impact of the Iran conflict.

Immediate path ahead will be bumpy for UK inflation. In July in particular, household/electricity bills are likely to rise reflecting the impact of the Iran conflict. We expect CPI inflation to rise from here through to Q4.

Implications for the BoE likely modest. This release seems unlikely to change the balance of views of the Monetary Policy Committee (MPC). BoE staff expectations were for 3.0% year-on-year headline CPI in April and 3.4% year-on-year for services CPI, so the numbers today are a bit softer than expected. However, for now the MPC seems focused on second-round effects from the energy shock. Slowing wage growth and more labour market slack (evident in this week’s labour market figures) should help contain one source of medium-term inflation risk, but some measures of inflation expectations are elevated. Meanwhile, it is a bit too early to be expecting to see much of an impact on broader prices from the energy price shock and most households have not seen the effects in household energy bills yet (which could have a feedback effect on inflation expectations).

The MPC will be closely watching all of this over the coming months. For now, we continue to pencil in a single rate hike for the BoE this year, followed by cuts next year.

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