Today’s release of the UK’s latest inflation data was widely expected to show UK consumer price inflation (CPI) at 2.6% per annum and the retail price measure (RPI) at 3.1%. Both outcomes were 0.2% below expectations at 2.4% and 2.9% respectively. What should we read into this surprise fall in UK inflation?
There has certainly been a more deflationary tone to global economic data over recent months. Measures of European inflation have surprised to the downside, which reflects the weak demand environment and poor economic health of the eurozone. Even in the US, where headwinds from fiscal policy have had a slowing effect on activity, but where growth and demand has still been sustained at low but positive levels, inflation has been subdued. Food and other commodity price falls have also helped emerging market and Asian inflation come off last year’s higher levels.
Today’s UK inflation numbers confirm that, after so many surprises to the upside in the past, the trend to lower inflation seen elsewhere has some power.
In addition to the headline inflation numbers released today, a measure of core consumer price changes that excludes energy, food, alcohol and tobacco fell to 2% per annum year-on-year, its lowest level since November 2009.
Despite today’s positive numbers, inflation remains above the level targeted by even the watered down Bank of England inflation remit. The Bank itself forecast some of the improvement seen today, but by its own admission still sees inflation ahead of a desired 2% rate for some time to come. Price falls were seen across the basket of goods measured, with particular weakness in air fares, always a volatile component of the calculation.
This is the first time in a long while that inflation data in the UK has surprised so dramatically to the downside. The policy implications from this single month’s reading are too remote to rely on, but a continued trend to lower inflation in the face of subdued growth would only support the notion that interest rates will stay lower for yet longer. This would provide Mark Carney, the new Governor of the Bank of England, with real scope to be inventive with monetary policy action should he feel so inclined.