In the last inflation release before the General Election, the CPI rate has remained stuck at 0.0%, the weakest reading since 1960. Prices have been falling steadily since June last year as the global oil price collapsed in June 2014 and retailers and supermarkets have been engaging in intense price competition.
Any changes from February?
The CPI headline rate remained unchanged in March from February at 0.0%. Falls in clothing and gas prices remained the strongest downward contributors but the drops were smaller than in the year to February. In the year to March, food prices and motor fuels fell by 3.2% and 13.7% respectively, reducing the 12-month CPI rate by 0.8 percentage points.
Nevertheless, there were some minor changes in the monthly inflation dynamics. Price movements in global oil prices continue to be the main driver of inflation in the economy. Between February and March, motor fuels saw a spike causing transport prices to increase by 0.7% as crude oil saw a 4.3% increase during the same period.
Food prices also made a smaller negative contribution of 0.2% compared to 0.5% in February, as dairy, vegetable, confectionary and soft drinks all saw price increases. These upward contributions were offset by continuing falls in the prices of clothing, housing and restaurants & hotels, leaving the overall CPI rate unchanged at 0.0%.
This low inflation environment is good news for consumers who see their real disposable incomes rise. One risk is that deflation will take hold in the economy after CPI inflation has plunged to 0.0% for two consecutive months. However, good growth in the economy and the imported nature of a significant proportion of the disinflationary momentum, mean that the risk of entrenched negative inflation expectations is relatively low. These dynamics should also mean that the BoE will continue to “look through” inflation when setting monetary policy (see our earlier blog).
What about manufacturers?
Input prices for manufacturers saw a small increase of 0.3% between March and February, while output prices rose by 0.2%, unchanged from the previous month. The slight increase in prices is mostly down to a rebound in the price of petroleum products between February and March 2015.
Still, input prices remain 13.0% below their level a year earlier and output prices fell for the 9th consecutive month by 1.7%. Monthly figures excluding erratic items, such as food, beverage, tobacco and petroleum products, also reveal a less inflationary outlook with input prices falling 0.7% between February and March. Lower input costs for manufacturers should continue to support output growth and better margins.
In terms of manufacturing sectors, most industries have stood to benefit from falls in input prices. The chemicals and rubber & plastics sectors have seen the largest falls in input costs in the year to March, falling by 6.5% and 5.8% respectively. This is to be expected given that petroleum products are direct inputs into production for these sectors.
The only main manufacturing industries where input costs have increased are the less price-sensitive high-value good industries, like aerospace and electronics. In the aerospace industry, input prices have increased by 2.1% in the year to March but came at lower than the 2.5% in the 12 months to February. In the electronics industry, input prices have increased by 1.2% and 1.1% in the 12 months to February and March, while output prices have only increased by 0.7% and 0.6% in the same period. This could suggest that margins are being squeezed in the electronics sector.
Overall, lower input prices and a strengthened consumer should continue to give a boost to the manufacturing sector as a whole. We expect low inflation to persist in the following months before creeping up towards the end of the year as disinflationary pressures from the lower oil price start to dissipate.