Biggest drop in inflation in a decade
Britain’s economy has a lot of problems right now, but inflation doesn’t appear to be one of them.
With CPI almost halving last month, Equals Group chief economist Jeremy Thomson-Cook says weak economic demand will keep prices low:
With headline consumer inflation at 0.8% and producer price inflation – simply price rises at the beginning of a supply chain – falling 5.1% in April alone courtesy of the recent declines in oil prices, we are more likely to hear concerns about deflation from central bankers.
As we have noted in the past, you need to have demand to create inflation and, for now, there is little demand. Some will return as employees earnings recover and more businesses reopen allowing consumers to spend more on different sectors but, similar to the pace of the economy reopening, is likely to be slow.”
Ruth Gregory of Capital Economics has spotted that this is the biggest drop in inflation in over a decade:
The slump in CPI inflation from 1.5% in March to 0.8% in April (consensus 0.9%; CE 0.8%) was the biggest drop since December 2008 and left inflation at its lowest since August 2016. This was largely due to energy effects, as fuel inflation slipped from -2.4% to -12.2% and utility inflation dropped from 3.9% to -6.8% (due to the decline in Ofgem’s price cap).
There was a partial offset from food price inflation, which rose from 1.1% to 1.3%, reflecting higher inflation for fresh fruit, meat and fish. The games, toys, hobbies and computer software categories provided also provided further upward pressure.
The slump in inflation will intensify speculation that the Bank of England could cut interest rates below zero (their currently 0.1%, a record low), says Chris Bailey, European Strategist at wealth managers Raymond James:
“Talk of negative interest rates has been doing the rounds in recent weeks, but with inflation now trailing expectation, falling from 1.5% to 0.8%, that debate has become very real.
All eyes now turn to the Governor of the Bank of England’s comments later today for signs of further action to boost economic activity. The Bank of England does have room to move, if it wishes, and Governor Bailey has already laid out the red carpet for lower interest rates, so we can be sure it’s at the front of his mind.