UK inflation has slowed over the past month but is likely to bring limited relief to households as it has stubbornly stayed in double digits on the back of rapidly rising food prices.
Consumer prices rose 10.1 percent in March from a year earlier, the Bureau for National Statistics said on Wednesday, slightly slower than February’s 10.4 percent. However, economists had expected the country’s inflation rate to fall below 10 percent for the first time since the summer.
Britain’s annual inflation rate peaked at 11.1 percent in October, but its downward trend was interrupted in February when the rate unexpectedly ticked higher. The Bank of England then hiked interest rates for the 11th time in a row to 4.25 percent in March, the highest level since 2008.
Wednesday’s data is a welcome return to inflation’s downward path, but the challenges facing the UK’s cost of living remain significant. Food prices rose about 19 percent year-on-year in March, with bread, meat and cooking oils continuing to rise rapidly. According to the statistics agency, bread and grain price inflation is at a record high. Core inflation, a measure that excludes food and energy prices, which tend to be more volatile, was 6.2 percent, unchanged from the previous month.
And the headline inflation rate is still high by international standards, as food prices are rising faster, corporate wage bills are rising and high household energy bills continue to push up the UK price index. In the United States, the consumer price index fell in March, rising 5 percent year-on-year, while the euro-zone inflation rate fell to 6.9 percent.
Although inflation is expected to slow sharply later this year as lower energy prices lower corporate costs and eventually lead to lower household bills, uncertainty remains as to how quickly the pace of price increases will return to the central bank’s 2% target. Bank of England policymakers have been watching private sector wage growth and service sector prices closely for signs of how deeply inflationary pressures are penetrating the economy.
On Tuesday, data from the Bureau of Statistics showed that non-bonus wages rose 6.6 percent in the three months to February from the same period last year, beating economists’ expectations. But there were also tentative signs that the UK labor market was beginning to ease, supporting bets that the Bank of England is close to halting rate hikes. In February, the pace of private-sector wage growth slowed slightly for the second straight month, while job vacancies fell and more people returned to the labor market, data on Tuesday showed.
Services inflation, which is heavily influenced by corporate wage bills, remained steady at 6.6 percent, data released on Wednesday showed interest rates rising again. The central bank had forecast in February that the inflation rate would fall to 9.2 percent in March.
“Headline inflation in the UK is once again heading in the right direction, but the Bank of England is still a long way from feeling confident that pricing pressures are under control,” Hugh Gimber, strategist at JPMorgan Asset Management, said on in an email comment on Wednesday, adding that another quarter-point rate hike in May is “very likely”.
“The biggest mistake would be to win early,” he warned in the fight against inflation.
A rate hike in May could be the last, said Samuel Tombs, an economist at Pantheon Macroeconomics. In April, the inflation rate will fall to 8 percent, he forecast on Wednesday, as the inflation contribution from household energy bills will weaken. A year earlier, household energy bills rose by more than 50 percent, but the impact of this will gradually disappear from the annual inflation index while an extension of the government’s guarantee on energy prices stabilizes household bills.
The Bank of England expects UK inflation to “fall sharply” later in the year and Central Bank Governor Andrew Bailey said companies should take this into account when setting prices to ensure inflation is indeed targeting the economy bank returns . There are growing concerns, particularly among some European Central Bank policymakers, that corporate efforts to maintain profit margins could keep inflation higher than expected as energy and other wholesale commodity prices fall.
On Wednesday, Britain’s statistics agency said overall costs to businesses have been “broadly stable” since last summer, but prices remain high.