11 Apr 2017

UK CPI: Soggy air fares help delay inflation’s ascent

Philip Shaw

Chief Economist

CPI inflation held steady in March at 2.3%, in line with consensus expectations, whilst we had expected a modest tick up to 2.4%. Core inflation (i.e. stripping out energy, food, alcohol and tobacco) actually moved down from 2.0% to 1.8% (consensus and Investec forecast 1.9%).

  • Easter falling in April in 2017, rather than in March (as it did last year) pressed down on the 12-month inflation rate through its effect on air fares; the 22.9% m/m Easter related rise in March 2016 was not repeated (fares fell by 3.9% on the month this March). Given this air fares effect, and some downward pressure from a month to month drop in petrol and diesel prices, the transport category overall shaved more than 0.3ppts off the 12-month inflation rate. Upward momentum to inflation from food price rises and other ‘non-core’ items such as tobacco and alcohol duty rises was more than offset by the transport drag.
  • The impact of the timing of Easter (which affected both the headline and ‘core’ CPI because air fares counts in ‘core’ inflation) will likely have the opposite effect in April and push up on the 12-month inflation rate. Indeed, looking through the month to month noise across the various price categories, we continue to judge that inflation is on the up from rising imported costs as a result of last year’s falls in the pound after the EU referendum. This is helping to drive up food price inflation, which stood in positive territory for only the second time in almost three years. Input cost data was released at the same time as today’s CPI figures. Producer input cost inflation rose by 0.4% month to month which nudged down the annual pace of price growth, but still left prices up a very robust 18% year over year. Output prices, as goods left the factory gate, stood some 3.6% higher, down just a touch from February’s 3.7% y/y rate.
  • We see inflation continuing to edge higher as we move towards the summer, reaching around 3%, and exerting a steady squeeze on real household spending. The latest figures for pay growth are due tomorrow, with the last print showing wage growth of 2.3% (3m yoy). At present, there is little serious evidence of a material upward trend in pay growth emerging to offset the pressure from higher inflation. Furthermore, note that the national accounts figures for Q4 2016 showed the household saving ratio fell to 3.3% in Q4 from 5.3% in Q3, the lowest level since records began in 1963, further limiting the capacity of households to maintain spending momentum. Already there are signs of a squeeze on spending, with the most recent BRC retail sales monitor indicating that, in the three months to March, total non-food retail sales (in values terms) fell by 0.8% per cent on a year earlier, as households focused more on essential purchases.
  • Aside from the unwinding of air fares effects, note that the April CPI inflation release, set for publication on 16 May, could add more fuel still to the inflation fire. A whole host of prices rises took effect either at the start of April or around that time, including further utility price hikes, rises in council tax bills (by more than last year on average) and increases in water bills (by 2%, compared to 1% in 2016/17).
  • The Bank of England’s Monetary Policy Committee will be assessing the squeeze to household spending carefully at its upcoming Inflation Report monetary policy meeting on (and in the run up to) 11 May. With little sign of firming wage growth and domestically generated inflation as yet, the Bank may well be happy to wait and see for a while longer before pinning its colours to the mast.