UK inflation data for February suggests the downward trend in inflation is likely to persist over the course of this year. The headline consumer price index (CPI) finally dropped below 3% for the first time since August 2017, to +2.7% in February (vs +2.8% expected), with the largest downward contributions from food and energy. Core CPI slowed from +2.7% to +2.4% (vs +2.5% expected), the lowest since July 2017. There was weakness across most categories in core CPI, in particular services, while footwear prices provided the largest positive contribution.
Today’s report (20th March) provides further evidence that many of the early 2017 price increases from the previous depreciation of the pound, have started to wane. The slower trend in services inflation also suggests some domestic weakness as activity growth cooled. Headline producer input and output prices also slowed more than expected in February, showing less pipeline inflation with prices of food and raw materials, such as petroleum products, falling. Overall, the data suggests the downward trend in inflation is likely to persist over the course of this year.
We expect the Monetary Policy Committee to stay put on interest rates at the meeting on Thursday 22nd March. The risk of a rate increase in May is balanced, as inflation has fallen more than expected, but the Brexit transition deal has been a positive. We will get more updates from Mr. Carney this Thursday (22nd March), but so far a majority of economists expect a rate increase in May* and the implied probability of that, based on interest rates futures, is 62% at the time of writing.
*Source: Bloomberg Survey 2018