Press release

22 Apr 2020 London, GB

Consumer Price Inflation dipped to 1.5% in March and set to fall back sharply over coming months – EY ITEM Club comments

A dip in Consumer Price Inflation (CPI) to 1.5% in March from 1.7% in February and a six-month high of 1.8% in January is at least a modest positive for consumer purchasing power, especially in the current highly challenging environment.

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  • A dip in Consumer Price Inflation (CPI) to 1.5% in March from 1.7% in February and a six-month high of 1.8% in January is at least a modest positive for consumer purchasing power, especially in the current highly challenging environment.
  • Inflation was helped down in March by lower fuel prices; there was also a significant downward impact from clothing prices and from restaurants and hotels. Core inflation edged back to 1.6% from1.7% in February.
  • It should be noted that inflation will be difficult to measure in the near term due to the restrictions caused by coronavirus.
  • Inflation looks certain to fall back significantly over the coming months and we believe it could get as low as 0.5% over the summer – which will provide some much-needed help for consumers and the economy. Sharply reduced oil prices (Brent has traded at its lowest level since mid-1999) will bring inflation down, along with substantially weakened economic activity in the near term at least.
  • Inflation will also be brought down by lower energy price inflation from April (when the April 2019 increase in Ofgem’s electricity and gas price caps will drop out of the year-on-year comparison).
  • Evidence of waning price pressures further down the supply chain in March was evident in producer input prices falling 3.6% month-on-month and 2.9% year-on-year. Meanwhile, the annual increase in producer output prices was limited to 0.3% (the lowest since July 2016) as they fell 0.2% month-on-month.
  • While it has come well off its March lows, sterling remains relatively weak and this may have some limiting impact on the drop in inflation.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

Consumer price inflation dipped to 1.5% in March from 1.7% in February and a six-month high of 1.8% in January. Inflation had previously spiked to 1.8% from 1.3% in December, which had been the lowest level since November 2016. Consumer price inflation averaged 1.8% over 2019, down from 2.5% in 2018 and 2.7% in 2017.

At 1.5% in March, consumer price inflation moved further below the Bank of England’s 2.0% target rate.

The Office for National Statistics (ONS) said the February inflation data largely predated the effects of coronavirus.

Inflation was helped down in March by lower fuel prices; there was also a significant downward impact from clothing prices, and restaurants and hotels.The price of petrol fell by 5.1p/litre between February and March compared to a rise of 1.2p/litre a year earlier.

Upward pressure on inflation in March came from higher air fares.

Core inflation edged back to 1.6% in March after rising to 1.7% in February from 1.6% in January and 1.4% in December (the lowest since November 2016). It had earlier been 1.7% in November, October and September.

Outlook for inflation

The ONS revealed that the latest inflation data was collected around 17 March, before the lockdown was imposed on 23 March.

Looking ahead, coronavirus means measuring inflation faces practical and conceptual challenges. The ONS observed that 45% of the CPI basket is physically collected by ONS staff in stores across 140 locations. And just over 40% of the same basket consists of clothing and footwear, restaurants and hotels, furniture and household equipment and recreation and culture - all areas where Government-mandated shutdowns mean spending is severely curtailed at present. The ONS has said this will require some innovations in measurement.

Inflation looks certain to fall back sharply over the coming months and we believe it could get as low as 0.5% over the summer.

Sharply lower oil prices will bring inflation down, along with substantially weakened economic activity in the near term at least. Brent oil fell to a near 21-year low of $15.93/barrel on 22 April; it had been as high as $65/barrel in late-January.

The lockdown of the UK economy – reinforced by appreciable consumer concern over their jobs and pay (despite Government support) – will weigh down on demand and likely exert downward pressure on prices.

Evidence of waning price pressures further down the supply chain in March was evident in producer input prices falling 2.9% year-on-year. Meanwhile, the annual increase in producer output prices was limited to 0.3% (the lowest since July 2016).

Inflation will also be limited by lower energy price inflation from April (when the April 2019 increase in Ofgem’s electricity and gas price caps will drop out of the year-on-year comparison). Additionally, Ofwat has proposed lower water and sewerage price caps from April.

While it has come well off its March lows, sterling remains relatively weak and this may have some limiting impact on the drop in inflation. The pound fell to its lowest level since 1985 against dollar of $1.1413 on 20 March; it also fell to its lowest level against the euro since March 2009 (95.0 pence). Sterling has since moved modestly back up to currently trade around $1.23 and 88 pence/euro.