CPI - Key points

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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.


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