Schroders Quickview: UK falls temporarily into deflation
We are unconcerned by a single negative reading of -0.1% from UK annual consumer price inflation and expect to see higher inflation as 2015 progresses.
19 May 2015
Deflation hits UK for the first time since 1960
Annual UK consumer price inflation fell to -0.1% in April – the first annual fall in the UK since records began in 1996, and the first time since 1960 based on comparable historic estimates.
Overall, we are not concerned by a single negative reading.
Lower inflation is helping to boost the spending power of households, raising demand in the economy, which should raise inflation rates in time.
In any case, we expect the UK to see higher inflation as we progress through the year and the impact from lower energy prices falls out of the annual comparison.
Bank of England faces interest rate conundrum
For the Bank of England, the challenge is to consider whether the near term disappointments on inflation and the recent GDP growth release outweigh the stronger labour market data seen lately.
If the Bank raises interest rates too quickly, it could scupper the recovery, but if it waits too long, it runs the risk of running higher inflation in coming years.
We expect the Bank to remain cautious, but to consider starting to raise interest rates later this year or early next.
Inflation misses consensus expectations
Consensus expectations were for no change at zero inflation from the previous month, but the downside surprise is largely caused by a significant downward contribution from transport services – in particular air and sea fares, with the timing of Easter this year being later than last, which causes shifts in holiday pricing.
Note, the retail price index (RPI) measure of inflation remained at 0.9%.
UK inflation has been low and falling for some time, largely due to the fall in global oil prices pushing fuel and energy bills lower.
Global agricultural prices have also been falling, helping to lower food price inflation.
However even the core rate of inflation (which excludes the more volatile energy, food, alcohol and tobacco) fell from 1% to 0.8%.
The strength of the pound versus the euro is helping to lower import price inflation and also partly explains recent trends.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.