UK inflation rate at 13-month low adds to BoE’s policy puzzle

LONDON: UK inflation slowed to a 13-month low in April, approaching the Bank of England’s (BoE) 2% target faster than economists had anticipated.

The rate of price growth fell to 2.4% from 2.5% in March, defying analysts’ predictions for no change. That sent the pound to the lowest level this year on Wednesday, and a market gauge of the likelihood of an August interest-rate hike slid to about 41%, from 47% on Tuesday.

BoE policy makers refrained from raising interest rates this month following a snow-blighted first quarter, but they remain concerned a lack of spare capacity may be starting to fuel domestically generated price pressures. Still, with the headline rate having dropped from 3.1% in November, the report complicates the case for an immediate rate rise, according to Fidelity International.

The BoE “has struggled to read the direction of price changes recently,” said Ed Monk, the firm’s associate director for personal investing.

“Inflation surprised to the upside at the end of last year, but the bank has overestimated inflation since then. With inflation trending lower, it only makes it harder for the Bank of England to raise rates.”

The reading for April is in line with BoE officials’ predictions for the second quarter as a whole.

They see a further drop to 2.2% by year end, before the measure falls to the 2% target in two years, partly because the pass-through of the pound’s depreciation since the Brexit vote is happening faster.

The pound fell after the ONS report, dropping 0.6% to $1.3352. It earlier touched $1.3349, the lowest level since December.

Slower inflation is good news for consumers, who are emerging from a year of falling real incomes. Downward pressure in April came from air fares, which fell 0.2% over the month compared with an 18.6% surge a year earlier, when prices were boosted by the Easter vacation.

The Easter holiday was in March this year. Upward pressure came from auto fuel, with rising crude prices increasing the cost of filling up the tank by 1.2%.

Soft drink prices saw their biggest ever increase for the time of year – up 2.8 percent from March – following the introduction of a tax on sodas with a high sugar content. However, the impact on inflation was limited, and many retailers haven’t yet passed on the levy to consumers, the ONS said.

Higher oil costs pushed up producer input prices last month, but inflationary pressures have eased sharply over the past year as the effect of sterling’s 2016 depreciation dissipates. Core inflation eased to 2.1% last month, the ONS said.

House prices in March rose 4.2% from a year earlier, the same as in February.

The worst-performing region was London, where values fell 0.7%, the biggest drop since September 2009 when Britain was in the grip of the financial crisis. — Bloomberg