UK inflation eases more than expected to 2.8%, led by lower electricity and gas bills – business live
James Smith, developed markets economist at ING, said double quotation mark Yes, UK inflation is set to rise again later this year, having dipped below
James Smith, developed markets economist at ING, said double quotation mark Yes, UK inflation is set to rise again later this year, having dipped below 3% in April. But the data should reassure the Bank of England that last year’s food price spike hasn’t triggered a wave of second-round effects across the inflation basket. Like yesterday’s jobs numbers, the data questions the need for aggressive rate hikes. We continue to think markets are overestimating the Bank of England’s willingness to tighten policy, at current levels of energy prices.
Investors are pricing between two and three rate rises by next spring. The fear of the hawks last year was that the rise in food inflation – a very visible trend to consumers – together with big payroll tax and minimum wage hikes, would manifest in a more persistent bout of inflation. So far, there’s not much evidence that’s happening. That should provide some reassurance that the impending energy shock is unlikely to spark a wave of “second round effects”, or at least not nearly as pronounced as four years ago.
Currently, we think the Bank is somewhere between zero and one hike(s), with officials arguing that the mere fact they aren’t cutting rates (as was previously likely this year) amounts to de facto tightening. That said, after April’s BoE meeting, we narrowly shifted our call for a prolonged hold to a one-and-done rate hike in June. That is now in serious doubt, though clearly a lot can still happen in the Middle East between now and then.
And we suspect if there’s no big improvement in energy flows by mid-June, officials might still be tempted to raise rates. We’re open-minded; it’s just as conceivable that the Bank could play for more time.
The BriefWire