UK inflation data - a surprise falд

March saw the first improvement in the inflation data in the UK for 7 months. This is encouraging, even though inflation is still double the Bank of England’s target rate.

There was a moderation in the increase in the price of food, clothing and footwear last month, but the largest decline in prices came from Audio-visual equipment, which fell more than 10 per cent. Gains in energy prices continues to expand and oil prices remain the chief upside risk to UK headline inflation in the near-term in our opinion.

Today’s data certainly pushes the UK away from a near-term rate hike and we tend to think the BOE won’t hike now until late Q3 or even Q4.

Earlier today the BRC retail sales data saw the largest monthly fall on record as high prices choked consumption growth. This is significant for monetary policy expectations. While the focus on a UK rate hike has been on rising price pressures, the BOE may not feel comfortable to raise interest rates until headline inflation starts to moderate thereby giving the consumer more breathing space.

We are in an unusual time for monetary policy whereby the BOE should not hike rates until the UK’s “bad” inflation shows signs of moderating. Only at the point will the UK’s economy be able to withstand a normalisation in rates.

Source: Forex.com

12.04.2011