UK CPI inflation could be less than 1% y/y by the end of 2016 – RBC CM

Research Team at RBC Capital Markets, notes that yesterday it was revealed that UK inflation in April eased, with the CPI rate coming back to 0.3% y/y from 0.5% y/y in March where we, and the consensus, had expected it to remain.

Key Quotes

“However, news of a lower outturn didn’t come as a total shock as at last week’s May Inflation Report the Bank of England had revealed its expectation for the move lower to 0.3% y/y that has now been confirmed. Core CPI fell to 1.2% y/y from 1.5% y/y.

Although the reversal of last month’s 14.2% y/y increase in airfares (a distortion arising from the timing of Easter) was widely anticipated for this month, we had thought that other factors such as increased fuel prices and some duty changes would offset the weak news on airfares. In reality, the negative contribution to the change in the headline inflation rate was also a function of a surprise fall in clothing prices as well anticipated cuts to social rents and household utility bills.

RPI inflation also undershot expectations at 1.3% y/y from 1.6% y/y last time, but on an unrounded measure the RPI-CPI ‘wedge’ barely changed this month. Another familiar theme in the inflation data is the split between goods and services. Although goods price deflation at -1.6% y/y has eased a little, it still looks as though it is too early to talk meaningfully about the inflationary impact of exchange rate depreciation since November. In reality, this month’s data report has turned out to be largely about the unwind of the airfares blip higher last time rather than news of a fundamentally more important theme.

In our preview we again highlighted that CPI inflation could be less than 1% y/y by the end of 2016 and that view seems at least equally valid after the April data. As the Bank of England acknowledged last week in the May Inflation Report though, the projected path for inflation in the event of a Leave vote in the EU referendum could lead to a notably different path versus current projections.

With that being the case it seems difficult to draw a firm policy conclusion from these data this side of the referendum. Even in the event of a Remain vote the continually muted levels of spot inflation and limited signs of a broad-based pick-up in pay growth mean we continue to see very little chance of a Bank Rate hike before February 2017.”