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CPI - Key points

Neil Prothero April 15, 2014 10:52

Annual consumer price inflation eased in March to a 53-month low of 1.6%, down from 1.7% in February and below the Bank of England’s 2% target for a third successive month. This maintains the downward trend in the headline CPI rate since the middle of last year. We forecast inflation to average 1.7% in 2014.

CPI inflation down to 1.6%
(annual rate; %)

Source: Office for National Statistics.

Key points

  • Largest contribution to the fall came from transport costs, particularly motor fuels.
  • Other downward price effects from clothing, furniture and household goods.
  • Modest upward contributions from higher prices for alcohol and in restaurants and hotels.
  • RPI measure up 2.5% year on year in March.
  • CPIH measure (includes owner-occupiers’ housing costs) up 1.6% year on year in March.

Inflationary pressures expected to remain subdued over 2014

After falling for six successive months—the longest consecutive decline in inflation since modern records began, according to the ONS—the March reading could mark a low point for CPI inflation. The impact of base effects from the timing of this year’s Easter holidays implies a modest up-tick in inflation next month.

But price pressures should remain modest. Although earnings growth will strengthen gradually in response to firming activity, the degree of slack in the labour market is likely to keep overall wage growth in check. Meanwhile, a period of weaker emerging market demand and the relative strength of sterling will continue to weigh on global commodity costs, not least energy and food prices.

Negligible price pressures in supply chains

Output (factory gate) prices fell slightly on a monthly basis in March, and were up just 0.5% compared with a year earlier. Highlighting the weaker trend in international commodity markets, input prices of materials and fuels bought by UK manufacturers for processing declined sharply, by 6.5% in the year to March.

Bubbling nicely? 

The broad inflation environment may be benign, but the same cannot be said for the housing market. According to ONS data, average UK house prices increased by 9.1% in the year to February, with prices in London surging higher by 17.7%. We think there is still little prospect of the Bank of England raising interest rates anytime soon, but with housing supply constrained, some form of policy intervention by the central bank to try to cool the housing market is possible this year.


Subdued inflation

Neil Prothero February 18, 2014 10:03

Annual consumer price inflation continued to edge down in January, easing to a 50-month low of 1.9%. Following a period in 2010-12 of high and often volatile inflation, the CPI rate has followed a downward trend from mid-2013 and the January reading marks the first time since late 2009 that headline inflation has come in below the Bank of England’s 2% target. However, UK inflation still remains quite a bit higher than average inflation in the euro zone (0.7%).

CPI inflation back below 2% target
(annual rate; %)


Source: Office for National Statistics.

UK consumer prices declined by an average of 0.6% over the month. According to the ONS, the largest contributions to the fall came from lower prices for recreational goods, cultural services, furniture and household equipment—an indication of ongoing retailer discounting.

There was little overall impact on the annual inflation rate from gas and electricity prices, as the recent tariff rises implemented by the "big six" energy companies were of a similar level to those a year ago.

Output (factory gate) prices edged higher in January, but only by a modest 0.9% year on year. The weaker trend in international commodity markets was evident in data showing a further decline in input prices. The overall price of materials and fuels bought by UK manufacturers for processing declined by 3.1% in the year to January 2014, the sharpest contraction in more than four years.

The Bank of England’s latest inflation forecast published last week was benign and we expect consumer price inflation to hover just below 2% over the coming months.

Underlying price pressures remain subdued, against a backdrop of still weak nominal wage growth (real incomes are still being squeezed), limited consumer purchasing power and relatively soft global commodity price trends. Import price pressures will also be contained by the strengthening of the sterling exchange rate over recent months.


Guiding light?

Neil Prothero February 11, 2014 08:00

It came as no surprise that the Bank of England left its monetary policy stance unchanged at its latest Monetary Policy Committee meeting last week. The nine MPC members voted to hold the policy interest rate at its record-low level of 0.5% for the 59th consecutive month, while also maintaining the Bank’s stock of asset purchases (via quantitative easing) at £375bn.

Nothing to see here? Well, not necessarily. Tomorrow the Bank of England will publish its quarterly Inflation Report, and alongside its revised forecasts for growth and inflation there is likely to be considerable market interest in what the central bank has to say about its much-maligned policy of "forward guidance".

Introduced by the new Bank governor, Mark Carney, just seven months ago, forward guidance followed the lead of the US Federal Reserve by linking future changes in UK monetary policy to conditions in the domestic labour market. Mr Carney stated last August that the Bank would not consider tightening its current policy stance until the unemployment rate fell below 7% (subject to caveats relating to financial stability). At the time the Bank believed that this threshold wouldn’t be met until the second half of 2016. The aim of forward guidance was therefore to reassure the private sector that short-term interest rates would remain at 0.5% for at least another three years, reducing uncertainty and encouraging households and businesses to borrow and spend.

Good intentions

That was the plan. However, since mid-2013 the rapid improvement in a range of UK economic indicators—including a sharp fall in unemployment from 7.8% to 7.1%—has prompted increasing debate, and no little confusion, over the Bank’s monetary stance, rather than the greater clarity that Mr Carney had intended. Bond investors have been pricing in policy rate hikes occurring much sooner than the BoE’s current forecasts suggest, prompting considerable media interest in when UK interest rates may start to rise.

When forward guidance was launched, the Bank of England’s own analysis implied that it viewed the unemployment rate to be the best available indicator of spare capacity, and thus inflationary pressures, in the UK economy. However, as the jobless rate has declined at the same time as headline inflation has eased back to target, Mr Carney and his colleagues have been forced to backtrack from their original guidance message. Indeed, last month in Davos the governor implicitly acknowledged that the unemployment threshold had to all intents and purposes been dropped.

"Members saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future" – MPC minutes, January 2014

Although the economy has rebounded unexpectedly strongly over the past year—annual real GDP growth of 1.9% in 2013 was the fastest since 2007—the overall period since the global crisis has seen the UK recovery lag well behind that of most other G7 economies. This latter point is one that the Bank governor, Mark Carney, and some of his MPC colleagues have been keen to stress in an effort to refocus attention away from the simple 7% threshold. Noting that the pick-up in economic activity has come from a very low base and that the level of UK GDP still remains some way below its pre-crisis level, the governor has also highlighted the still subdued trends in real wage growth, on-target inflation and falling long-term unemployment as evidence that there is still considerable slack in the economy. This supports Mr Carney’s recent statement that "the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy".

The debate over spare capacity is not clear-cut, however. A number of economic commentators have noted that a range of labour market indicators—not just the jobless rate—have tightened over the past six months, that productivity trends remain very weak, and that recent survey data point to constraints on capacity and recruitment returning close to pre-crisis levels in some areas of the economy.

Easy does it

Mr Carney has so far appeared to adopt a more dovish stance than some other members of the MPC, although it is clear that a majority of the Committee still see little prospect of a rise in the policy interest rate anytime soon (in line with most independent forecasters, we don’t anticipate any policy tightening until at least early 2015). But with the positive near-term economic outlook expected to support a further reduction in the jobless rate to below the 7% threshold in the coming months, the Bank of England now has little option but to revise its forward guidance policy.

What form this could take is open to debate—options include:

  • lowering the unemployment rate threshold
  • announcing another form of "state-contingent" guidance linked to different indicators
  • revealing individual MPC members’ views on future rates; or
  • specifying an explicit period during which interest rates will remain on hold.

Whatever is decided, Mr Carney for one will hope that it proves to be a more effective and more enduring policy than the Bank’s initial effort.

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CPI - key points

Felicity Burch January 14, 2014 09:35

The Consumer Price Index fell to 2.0% in December, in line with the Bank of England’s target for the first time since November 2009. This continues the downwards trend we have seen in inflation since June 2013.

According to ONS, the largest contributions to the fall in the rate came from prices for food & non-alcoholic beverages and recreational goods & services.

There was a small upward contribution to inflation from energy bills, as the increase in gas and electricity prices in December 2013 was slightly larger than the increases a year earlier.

Looking ahead to 2014, although energy prices should keep CPI around the 2.0% mark for the time being,  inflation is likely to dip below-target over the course of the year as spare capacity in the economy makes itself felt. We expect inflation to average 1.7% over the year.


CPI falls again

Rachel Pettigrew December 17, 2013 10:43

The Consumer Price Index (CPI) fell once again in November, coming in at 2.1%. This is below the consensus forecast that CPI would remain at the 2.2% level of last month.

CPI has been on a downward trend since June, where it had peaked at a 14 month high. Since then we have seen CPI fall 0.8 percentage points over a period of five months to reach the lowest level of CPI growth since November 2009.

Over the past year, pressure from the basket of goods that make up CPI have not been consistent, as shown in the table below. However, downward pressure on prices outweighed the upward pressure.

Downward pressure  

 Upward pressure

  • Food and non-alcoholic beverages, especially fruit 
  • Transport sector prices, especially motor fuels 
  • Housing and household services, most pressure coming from gas and electricity 
  • Recreation and culture, mainly from prices of games, toys and hobbies, and data processing equipment 
  • Restaurants and hotels 

We expect CPI to remain low in 2014 at 1.8%.

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Forward Guidance – Carney and the Select Committee

Felicity Burch September 12, 2013 11:35

This morning Mark Carney was in front of the Treasury Select Committee to answer questions on the latest Inflation Report and Forward Guidance.  Here’s a quick summary of the key discussion points:


1. Is Forward Guidance Good for Growth?

Carney’s view was that Forward Guidance was supporting growth, arguing that it made monetary policy clearer and therefore more effective.
This seems to be the case, in the Bank’s quarterly survey of households’ inflation expectations following the announcement they found:

The treasury select committee expressed some concern that long-term interest rates had risen as a result of the Forward Guidance policy, as this might hit complanies looking to take out long term loans. Carney said he knew this might happen, but said that about the majority of loans that were important for short term growth were linked to the Bank Rate.


2. Does Forward Guidance risk too much inflation?

Although the Forward Guidance implies that rates won’t rise until ILO unemployment falls to 7%, there are caveats in case inflation starts to pick up. In fact, there are three “knock outs” with regard to inflation, which could cause the committee to reconsider interest rates.

The first “knock out” comes into play if: "In the MPC’s view CPI inflation will be more than 0.5 percentage points above or below the target in 18-24 months’ time".

There was some discussion about whether this was a reasonable knock out – it was raised that the MPC’s forecasts had underestimated inflation in 29 out of 32 quarters – but MPC members explained that this was why the other two knock out clauses were in place (see our previous blog for more information on these).

And while the MPC’s forecasts may have underestimated inflation in the past, their current forecasts are not out of kilter with others. The highest forecast in the Treasury’s compilation is for CPI to be at 2.8% (Schroders) in 2015. The average forecast is 2.2%.

In addition, Carney argued that inflation expectations actually came down after Forward Guidance was announced. The Bank’s survey found the following:


3. Where next for the UK economy?

Carney said that we had seen some welcome improvement in the UK economy but that the early momentum would need reinforcing. “We have a recovery and recent data is consistent with some strengthening and broadening of this. But it is early days.”


August MPC Minutes and Forward Guidance Voting

Rachel Pettigrew August 14, 2013 11:09

The minutes of the Monetary Policy Committees August meeting were published today, and in it the details of the Committee's discussion of voting and decisions regarding forward guidance. We already knew that they adopted some soft forward guidance. See this previous blog for further details on the nature of the forward guidance.

The minutes provide some further information about the reasoning behind the decisions and the alternatives that were considered by the Committee.

  • Framing the guidance in terms of economic conditions was seen as more effective than specifying a time period for maintaining the stimulative monetary policy stance.
  • The volatility, likelihood of revision and the need to spell out the development of potential supply outweighed the positive benefits of using real GDP.
  • The more stable measure of the unemployment rate, which tends to move with spare capacity in the economy, was seen as a better indicator.
  • There was some disagreement on the timing of the inflation knockout indicator, with one member strongly in favour of a shorter horizon for bringing inflation back to the 2% target.

The Voting…

This month Committee members voted on three decisions and the voting was largely, but not entirely, unanimous.

  • Unanimous vote to keep the bank rate at 0.5%
  • Unanimous vote to keep the stock of asset purchases at £375 billion.
  • Unanimous support for the adoption of forward guidance, however, one member – Martin Weale – voted against the proposition on the view that the time horizon for the inflation knockout was too long.

The Discussion…

As always, the MPC had a full discussion of economic conditions and developments. The key factors driving the MPC’s decisions are summarised below.

Financial markets are less volatile…

  • Statements and comments from central banks have partially driven down market expectations of changes to the official interest rates.
  • The Sterling depreciated over the last month in line with the fall in interest rates.

…but international demand conditions have been mixed.

  • News from the Euro-area has been better than expected, with consumer confidence picking up, credit conditions stabilising, and survey indicators rising to their highest level for over a year.
  • But the slowdown in emerging markets seems to be more protracted. In China, progress towards rebalancing has been very slow and quarterly growth has steadily declined. Other emerging markets are facing the combined challenges of slower growth, high inflation and capital being taken out of the country.
  • The US recovery is proceeding as expected and consumer spending has improved.
  • Weaker commodity prices are, in part, mitigating the slowdown in emerging economies.

Movements in the domestic economy have been largely positive…

  • On the domestic front, nearly all indicators are looking up, providing the most positive set of data for the UK seen for some time.
  • GDP grew strongly, with broad-based improvement across many sectors, and may be reflecting higher business confidence and lower credit conditions which may see business investment embark on its long-awaited recovery.
  • Survey indicators have continued to improve.
  • Improved consumption, consumer confidence and retail sales all point to households playing a stronger supporting role in growth. Housing market activity is showing some modest increases.

…though inflation looks set to remain above target for the next year or two.

  • CPI inflation was 2.9% in June, slightly lower than the Committee was expecting due to lower than expected airfares and seasonal food prices.
  • Pay growth has been volatile and below the average of the past three years.
  • Employment has remained robust. ILO unemployment remained at 7.8% in the three months to June.

July MPC meeting minutes

Rachel Pettigrew July 17, 2013 14:58

At their meeting in early July, the MPC welcomed Mark Carney. A summary of the key issues considered at their meeting is outlined below.  

Financial markets

  • Volatility in financial markets has increased sharply in response to comments by US monetary policymakers.
  • UK rates, both short-term and long-term, have risen surprisingly. This prompted the MPC giving some soft forward guidance on the timing of changes to policy rates.

The international economy

  • US economy is looking slightly weaker in q1; GDP growth was revised down and household spending is looking less resilient. However the recovery still looks to be in place for the medium-term with consumer confidence, the job market and housing markets looking on the up.
  • Euro-area activity seems to have stabilised with consumer confidence picking up but unemployment and political developments in some countries add uncertainty to the picture.
  • Recent data from emerging markets looks largely disappointing with medium-term supply capacity potentially weakening. Oil prices have risen slightly as a result of political tensions in the Mid-East.

Money, credit, demand and output

  • The new method of calculating investment spending means business investment is actually 20% lower than previously estimated.
  • Improvement in other activity indicators has led to the bank upping its forecast of GDP growth in q2 by 0.1% despite wide-ranging uncertainty.
  • The second half of 2013 is expected to continue to pick up with much growth coming from the household sector.

Supply, costs and prices

  • The inflation forecast remains similar to last month despite CPI inflation rising to 2.7% in May from 2.4% in April. CPI is expected to reach and remain around 3% in June through to Autumn.
  • Measures of pay show some growth which will give strength to the household sector but the rate of growth has slowed since mid-2012.
  • Productivity remains weak and profit margins are lower than normal.

The policy decision

Overall, signs in the domestic economy are largely positive with activity picking up and some reduction in uncertainty. Looking beyond domestic markets shows more of a mixed picture with weaker data from the US and emerging markets but some positive shifts in the euro-area. Interest rates have risen somewhat but MPC members did not consider these rises to be warranted by movements in the domestic economy.


  • The MPC members voted unanimously on both the bank rate and the stock of asset purchases.
  • Both were kept at their current levels. 

A more positive tone

Rachel Pettigrew May 15, 2013 17:11

Today’s inflation report brings a more positive tone to the future outlook than has been seen for a while, with both the output and inflation forecasts having been revised in a positive direction. The improvement was driven by signs of early momentum picking up in the wider economy. We look at some of the reasons behind each of the revisions in turn.

Output forecast revised up

The upside surprise of 0.3% growth in the first quarter of this year underpins a number of other indicators that give rise to the expectation of stronger GDP growth over the course of this year. Demand and supply are expected to pick up gradually with a number of factors contributing to this change in view. While employment has fallen back somewhat, it is expected to pick up more than previous estimates, household real incomes have led to some up-tick in consumption and the extension to the Funding for Lending Scheme is expected to ease credit conditions and boost demand.

Risks do remain, however, and the recovery, though slow, will depend on how households and businesses respond. The international environment will continue to weigh on sentiment, particularly those risks pertaining to the Eurozone.

Inflation forecast revised down

In the past couple of months inflation remained sustained but for the first time in a while the forecast has been revised down though it will still take the best part of two years to return to target. The slow return to target is expected as administered and registered prices are to remain elevated.

The improvement in the overall forecast was driven by expectations of external price pressure being lower and higher labour market participation dampening down domestic pay pressures.

All in all, the picture is somewhat more positive but the overall trends are not much changed. Inflation will continue to remain above target for some time and, while the economy will remain subdued, it will be growing. As we have mentioned in an earlier blog we want to see the government doing everything possible to support growth, by providing more certainty to business that they have a plan get the economy growing again and ensuring decisions, such as the upcoming spending review, do everything possible to support growth.

Summary of April MPC Minutes

Rachel Pettigrew April 17, 2013 12:12

The Decision

Bank rate held at 0.5%

Stock of asset purchases held at £375 billion.

The Discussion  

Financial markets

  • Relatively limited reaction from financial markets to Cyprus bailout
  • Equity markets continued to be buoyant, some major international equity indices at all-time nominal highs
  • Little reaction to UK being placed on negative watch by Fitch

International economy

  • Global growth continues to show gradual recovery with world trade and investment  picking up in early 2013 but pattern of growth remains uneven
  • Tentative signs of strengthening confidence in the Euro area have  not been maintained
  • US indicators positive with robust consumer spending, a strong housing market and growing employment despite more restrictive fiscal policy.
  • Asia still showing evidence of expansion with Chinese PMI rising in March and business confidence improving in Japan.

Money, Credit, Demand and Output

  • Turning to the UK, there is mixed news of activity in the first quarter of 2013 from official indicators
  • Credit conditions have eased with the supply of credit increasing and some feed through in loan rates. However small companies continue to report more difficulties accessing finance and there has been little sign that easing of credit access has fed through into higher net lending to businesses.
  • There is some evidence of increased supply of credit feeding through into the housing market.
  • The committee agreed that a well-capitalised banking system is important for the capacity of the economy over time and saw merit in boosting lending through an extension to the FLS.

Supply, Costs and Prices

  • Inflation expected to remain high, rising to 3% in the middle of the year
  • Pay growth has continued to be weak
  • Productivity remains puzzling as employment continued to increase despite falling output. Relatively low company failure due to low nominal interests rates and forbearance by lenders was discussed as one of the factors contributing to low productivity.

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