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UK Inflation Cools More Than Expected to Slowest Pace Since 2021 - BLOOMBERG

MARCH 20, 2024

BY  Tom ReesBloomberg News

, Source: Statistics agencies, Bloomberg Economic Surveys

(Bloomberg) -- UK inflation fell more sharply than expected to the lowest level in 2 1/2 years, bolstering investor expectations that the Bank of England will be able to reduce borrowing costs in the coming months.

The Consumer Prices Index rose 3.4% in February from a year earlier, compared with 4% pace the month before, the Office for National Statistics said Wednesday. The figure was lower than the median of 3.5% predicted by economists and the BOE, although it was in line with the Bloomberg Economics’s forecast.

BOE Governor Andrew Bailey and his colleagues are weighing when to start cutting rates from a 16-year high of 5.25%, but a move at the central bank’s meeting Thursday is unlikely. Policymakers in London say they need to see further evidence that price pressures will fall back sustainably to the 2% target before easing.

Core inflation, which excludes energy, food, alcohol and tobacco fell as expected to 4.5% from 5.1%. Meanwhile, inflation in the services sector — watched closely by the BOE for indications of domestically driven price pressures — fell to 6.1% from 6.5%. That matched BOE expectations, even though it was slightly less what outside analysts expected.

“Inflation is heading in the right direction and should fall below the Bank of England’s 2% target sometime in the Spring,” said Alpesh Paleja, lead economist at the CBI. “However, the path beyond this is likely to be bumpy. Shifting base effects mean that it will likely rise back above 2% later in the year.”

Traders increased wagers on interest-rate cuts for the year after the release. The market is close to fully pricing three quarter-point reductions by December with the first move expected in August, though there’s a more than 50% chance that could come in June, according to swaps tied to policy-meeting dates. 

The pound whipsawed, briefly falling to a day’s low of $1.27 before erasing losses. The pound is the best-performing major currency against the dollar this year on expectations the BOE will hold rates higher for longer than other central banks. 

“As inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates,” Chancellor of the Exchequer Jeremy Hunt told broadcasters Wednesday, in comments that underscore the political stakes of the officially independent central bank’s next policy move. “That brings down mortgage rates. That makes a very big difference.” 

Prime Minister Rishi Sunak is hoping the bank can begin cutting interest rates soon enough for voter to feel the relief before his Conservatives face Keir Starmer’s resurgent Labour Party in an election expected in the “second half” of the year. In his remarks after the inflation data release, Hunt repeated his suggestion from a day earlier that the election could be held in October, but said such a decision would be “up to the prime minister.”  

Of particular relief for the government was a slowdown in cost pressures for some of the things that consumers notice most in their daily spending. Food prices and costs in hotels, restaurants and cafes helped to drag down the headline rate. 

There was upward pressure from motor fuel, housing and household services. The figures are based on an updated basket of goods and services, as is the usual practice at the start of each year.

What Bloomberg Economics Says ...

“While the print was a touch below the central bank’s expectation, services inflation — a key metric for the BOE — came in in line with its forecast. February’s CPI print doesn’t change the big picture — the headline measure is on track to fall below its 2% target in the spring. The BOE will have that information in hand at the June meeting, when we expect the first cut.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.


The latest reading brings the UK closer to the inflation levels prevailing in the US and euro area, where policymakers are preparing to ease off on the monetary tightening imposed to get prices under control after the pandemic. The US Federal Reserve this evening may give hints about when it will cut rates, with officials indicating three quarter-point reductions this year.

BOE officials are waiting for March and April data to ensure inflation is settling back to the 2% target and in the second quarter may dip below US levels for the first time in almost two years. Those figures will include a sharp dip in energy prices when a cap on consumer bills resets and also an annual round of pay settlements. A number of consumer services including mobile phone plans also update in those months.

Britain had the worst inflation in the Group of Seven nations last year after a jump in food and energy prices prompted workers to demand higher wages. It left consumers feeling poorer, a trend that has started to abate as wage growth now outstrips price increases. Surveys also suggest the economy picked up slightly after a shallow recession in 2023.

Overall, Sunak is facing a bleak backdrop for fighting a general election. The BOE and private-sector economists expect growth of just 0.3% this year, leaving Britain trailing most advanced economists for another year.

“The outlook for consumers is brightening,” said Zara Nokes, global market analyst at JPMorgan Asset Management. “While the Bank of England will also cheer the decline in the headline figure, it is unlikely to be convinced that the battle against inflation is won.” 

There were also signs of slower pipeline cost pressures at the wholesale level. Producer input costs were down 2.7% year-on-year. Output prices at the factory gate were up just 0.4%.

--With assistance from Harumi Ichikura, Andrew Atkinson, Irina Anghel, Constantine Courcoulas, Brendan Scott and Isabella Ward.

(Updates with market reaction and producer prices.)


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