Inflation up, but has probably peaked for the year

by | May 22, 2019

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Ben Brettell, Senior Economist at Hargreaves Lansdown comments on the latest figures released today.


 

UK consumer price inflation ticked up in April to 2.1%, exceeding the Bank of England’s 2% target for the first time this year. As expected, air fares and energy prices drove the increase, after energy regulator Ofgem increased its price cap for standard variable tariffs.

Higher inflation would usually bring pressure on the central bank to raise interest rates – but these are far from normal times. The Monetary Policy Committee is rightly reluctant to tweak policy while Brexit hangs over the economy like the Sword of Damocles. Moreover, fuel and energy prices are notoriously volatile from month to month, and are usually led by factors outside the control of domestic monetary policy. I’d expect the headline rate to fall back as we move through 2019. Core inflation, which strips out these volatile components, remained unchanged at 1.8%. So today’s data changes little – the absence of domestic inflationary pressure means policymakers have licence to leave rates on hold for now.

 

This was borne out in the market reaction, with sterling little changed on the news. This muted response shows traders haven’t adjusted their prediction that the Bank of England’s wait-and-see approach will hold firm at its next meeting on 20 June.

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