“Today's inflation statistics are broadly in line with market estimates of a pick-up in the rate of inflation with CPI now standing at 1.8%, up from 1.6% in March. The change in the headline rate is caused mostly by fuel prices being flat between March and April this year compared with a sharp fall at the same point last year, i.e. more of a statistical effect than any major change in market prices over the past two months. This has caused a sharp rise in service sector inflation, rising from 2.3% to 2.8%, only marginally offset by a small fall in goods inflation from 1% to 0.9%, driven itself by continued strong falls in total input prices with weak commodity prices in the global market.
“Factory gate prices (producer output prices) rose slightly to 0.6% in April and input prices continue to fall by 5.5% per year, though the rate of the fall is slowing compared to last month's -6.3%. Global commodity prices remain benign and the current relative strength of Sterling compared to other currencies, particularly the US Dollar (in which many commodities are priced) continues to feed weaker inflation into the UK economy.
“We believe that the outlook for inflation across the rest of the year remains benign and the Bank of England's target of 2% will broadly continue to be met. Fears of deflation are currently overblown and it is not yet clear how much spare capacity there truly is in the UK economy. The labour market is tightening quickly with employment growing at its fastest rate on record. Wage rises are close to the level of inflation (1.7% for the three months to March) and we expect the April pay round to show a stronger rise when it is fully shown in the data for the Labour Market release in June. This will place further upward pressure on pay demands within the UK but the broad inflationary environment is currently affected more strongly by levels of global trade, economic conditions in our main trading partners and their effects on commodity prices and currency trading. For now, the outlook is good, and we still expect real pay to increase from the second quarter of this year and improve further as the economy continues to grow.
“Inflation remaining close to the Bank of England target will further allow the MPC to stay its hand on Bank Rate increases which we still expect to begin to move in the first half of 2015. We believe it unlikely that the Bank would move to tighten monetary policy in advance of the United States Federal Reserve doing so and in light of potential developing monetary policy within the Eurozone. Any moves in UK Bank Rate earlier than the US would likely increase the strength of Sterling placing further downward pressure on UK inflation.”