Inflation drops to its lowest level in a year as the Brexit spending squeeze finally lets up

  • Inflation falls to its lowest level in a year.
  • Consumer Price Inflation – the key measure – fell to 2.5% in March, down from 2.7% in February.
  • Part of the fall was driven by “women’s clothing prices rising slower than usual for this time of year,” Mike Hardie, the ONS’s head of inflation said.
  • The pound falls sharply on the news, dropping more than 0.5% against the dollar.

LONDON – The level of inflation in the UK fell more than expected in March, as the squeeze on the cost of living for Brits caused by the Brexit vote abates.

The Office for National Statistics said on Wednesday that the UK’s Consumer Prices Index (CPI) inflation rate – the key measure of inflation – was 2.5% in February, down from 2.7% in February and lower than economists’ forecasts.

CPI measures the weighted average of prices of a basket of goods and services, such as food, transportation, and medical care.

CPIH, a measure which includes costs associated with maintaining a home – and which the ONS cites as a more useful indicator of living costs than CPI – was 2.3%, down from 2.5% last month.

“Inflation fell to its lowest rate in a year, with women’s clothing prices rising slower than usual for this time of year,” ONS Head of Inflation Mike Hardie said in a statement.

“Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget not appearing this March, thanks to its new autumn billing.”

Here’s the chart of inflation’s path in recent years (note the sharp drop in recent months):

Screen Shot 2018 04 18 at 09.59.35Office for National Statistics

Prior to the vote to leave the EU in June 2016, inflation in the UK had been subdued for several years, but the vote caused a fall in the value of the pound which pushed up inflation. However, as the pound recovers, inflation has started to fall, dropping from 3% in January its current level.

Most forecasters, including the Bank of England, had expected inflation to fall sharply in 2018. Those forecasts are now materialising.

Wednesday’s inflation data comes just 24 hours after the ONS revealed that wages in the UK grew by 2.8% over the most recent data period. That figure, coupled with the inflation number, means that wages in the UK are growing in real terms for the first time since the beginning of 2017.

While on the surface these two data points combined look like good news, Ben Brettell, a senior economist at FTSE 100 investment firm Hargreaves Lansdown believes it is a little more complicated.

“The interplay between wages and prices will be interesting over the coming months. Inflation looks to be falling back as predicted, but with wages picking up and unemployment still falling, it’s possible this tightness in the labour market could eventually push inflation back up,” he said in a statement.

“Higher wages mean more money chasing the same amount of goods and services, which could lead to higher prices. At the same time firms might choose to pass on higher staff costs to the end consumer.”

Pound plunges

The pound has rallied sharply in April and hit a post-Brexit high earlier in the month, but it fell significantly following Wednesday’s inflation figures. Sterling dropped by around 0.5% against the dollar to trade at $US1.4210, as the chart below shows:

Screen Shot 2018 04 18 at 09.42.24Markets Insider

“Sterling has fallen against the dollar, not because an imminent interest hike has been called into question – this now seems all but assured – but rather because today’s data casts doubt over the likelihood of a further rate hike in November,” Jake Trask, FX Research Director at OFX said in an email.

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