UK inflation holds steady at 2.3pc due to delayed Easter effect

UK inflation eased slightly on a monthly basis in March but remained above the Bank Of England’s 2% target rate for a second month, with a rise in food prices offset by lower air fares due to a later Easter this year.

The Bank of England's Monetary Policy Committee is keeping a close eye on inflation as it weighs various economic factors in determining whether to lift interest rates from their historic low, with wage data on Wednesday another key metric.

The headline consumer prices index for March remained 2.3% higher than last year for a second consecutive month, as forecast.

On a monthly basis CPI rose 0.4%, down from the 0.7% jump in February but more than the 0.3% increase the market expected.

Core CPI, which excludes more volatile prices like fuel and food, eased off to 1.8% from 2% a month ago. Food price inflation rose to 1.6% from 0.3%.

The Office for National Statistics also revealed that CPIH, the newly favoured official figure which includes owner-occupiers’ housing costs, also stood fast at 2.3% as predicted.

Rises in food, drink and clothing prices in March were offset by air fares, which fell slightly but last year rose substantially thanks to the timing of Easter, the ONS said.

With Easter falling in March last year but on 16 April this year, air fare inflation fell by 3.9% on the month, compared with a hefty 22.9% rise in the same month a year ago, which knocked 0.2 percentage points off CPI in March.

“The costs of raw materials and the price of manufactured goods leaving factories were both little changed, as falling fuel prices helped stem further rises," according to ONS statistician Jonathan Athow.

“While house prices and rental costs rose over the year, the rates of increase continued to slow markedly.”

Economists warned that the Easter effect will affect April's figures, so a further lift in inflation should be expected in a month's time, while CPI is widely predicted to reach at least 3% by the end of the year.

Bank of England under pressure?

Ruth Gregory at Capital Economics said March represented a "temporary pause in an upward trend", with upward pressure on consumer prices coming from sterling’s fall, rebounding airfares in April and sharply rising electricity prices in the coming months as a result of utility companies’ price hikes.

"But we don’t think that that will panic the MPC into raising rates imminently. After all, the MPC tolerated an inflation overshoot of 3pp in 2011. Given the uncertainty around the Brexit negotiations and the fact that there has been little sign of building domestic cost pressures, we continue to think that the MPC will hold off until the middle of next year before raising rates."

There will be growing unease at the Bank of England, argued Richard de Meo of Foenix Partners, as they will be aware that more dramatic inflation rises were only avoided due to declining oil prices.

"Today’s data does not quite activate the MPC admission that a 'little further upside' in inflation could lead to an 'immediate reduction in policy support', yet a definite but delayed bounce in the pound confirms that markets are re-assessing their Bank of England positions.

"What remains somewhat baffling is that only a quarter of the market expects a rate rise this year; our view is that the Bank of England will not be making an allowance for Brexit uncertainty as they set policy and neither should financial markets."

Effect on consumers

The recent spike in the proportion of retailers that say they will increase prices over the next three months suggests that the MPC will continue to be surprised by how quickly higher import prices feed through to consumers, said Sam Tombs at Panthon Macroeconomics.

Alongside the boosted over the next two months from utility price rises, he forecast CPI inflation will climb to about 3.5% by the end of this year, peaking earlier and higher than the MPC expects.

"Further upside inflation surprises might persuade more members on the MPC to vote to hike rates soon. Nonetheless, with wage growth showing no sign yet of following inflation higher, we continue to expect a majority of MPC members to vote to keep Bank Rate at just 0.25% this year."

Maike Currie, investment director at Fidelity International, highlighted the bald effects on the UK consumer.

"With price rises outstripping wages, we are getting progressively poorer each month. Unsurprisingly, consumers are choosing to instead focus their spending on essential items like food and fuel.

She said changing shopping habits and a fall in spending shown by the British Retail Consortium data published earlier on Tuesday "should flash amber warning lights" for an economy reliant on confident consumers.

"Inflation never looks like a problem, until suddenly it is a big problem. Once pricing pressures become entrenched, consumers’ feel the pain, companies don’t invest and the market gets worried."