United Kingdom rate hike in May still likely despite inflation drop

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United Kingdom inflation fell to 2.7 per cent in February, slowing more than expected and relieving some of the pressure on the Bank of England (BoE) to hike interest rates.

Sterling fell below $1.20 to a 30-year low against the dollar in the months after the United Kingdom voted to leave the European Union, contributing to a spike in inflation.

Inflation in Germany and France has been running at less than half the British rate.

Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy, was unchanged at 4.1 percent year-on-year in February, while on a month-on-month basis it quickened to 1.1 percent from 0.2 percent previously.

Prices jumped in February of last year, taking some of the steam out of the latest year-on-year comparisons, the Office for National Statistics said.

Furthermore, sterling has strengthened in recent months on signs that Britain will avoid a disorderly Brexit.

The figures suggest the squeeze on households, caused by rising inflation and stagnant wages, may be ending.

Phil Gooding, the ONS head of CPI said a small fall in petrol prices alongside food prices rising more slowly than a year ago helped to bring down the rate in February.

Petrol prices dropped by 0.2 pence a litre to 120.8 pence a litre on the month, while diesel slipped by 0.1 pence a litre to 124.4 pence.

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The hotel prices also dropped, and ferry tickets are rising more slowly than previous year.

However, with the Pound having reached its lowest ebb in October 2016, the fall is now expected to drop out of the prior year base numbers and so many economists expect inflation will fall in 2018.

Economists expect those figures to show pay growth edged higher, to an annual rate of 2.6% in the three months to January.

The situation may be further improved this year, says Bank of England.

The Bank of England is expected to keep interest rates on hold at 0.5% on Thursday, but the meeting will be watched closely amid expectations over another hike in May.

The Pound was bid higher during early trading in London Tuesday as markets positioned for the February volley of United Kingdom inflation figures, which are expected to show domestic price pressures in retreat.

The Consumer Prices Index including owner-occupiers' housing costs (CPIH) - the ONS' preferred measure of inflation - was 2.5 per cent last month, down from 2.7 per cent the month before.

Among manufacturers, the cost of raw materials - many of them imported - was 3.4 percent higher than in February 2017, way down from a peak increase of almost 20 percent in January a year ago.

Food prices were also applying downward pressure, lifting 0.1 per cent between January and February in contrast to a 0.8 per cent rise the year before.

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