Press release

20 May 2020 London, GB

Consumer Price Inflation Down to more than four-and-a half year low of 0.8% in April; Further declines look on way – EY ITEM Club Comments

A near halving of consumer price inflation to 0.8% in April is at least a modest positive for consumer purchasing power

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  • A near halving of consumer price inflation to 0.8% in April is at least a modest positive for consumer purchasing power.
  • It is the lowest level since August 2016 and down from 1.5% in March and 1.8% in January.
  • Inflation was brought down by lower energy price inflation as the April 2019 increase in Ofgem’s electricity and gas price caps dropped out of the year-on-year comparison. There was also a major downward impact from lower fuel prices. 
  • There were also significant downward impacts from clothing prices (reflecting increased discounting) and miscellaneous goods and services.
  • It should be borne in mind that inflation is currently difficult to measure due to the restrictions caused by coronavirus, as has been stressed by the ONS. The ONS reported that prices were unavailable for around a fifth of its inflation basket in April.
  • Inflation looks certain to fall further and the EY ITEM Club believes it could get as low as 0.3% over the summer. Low oil prices will limit inflation, along with weakened economic activity in the near term at least.
  • Evidence of weak price pressures further down the supply chain in April was evident in producer input prices falling 5.1% month-on-month and 9.8% year-on-year. Meanwhile, producer output prices were down 0.7% year-on-year (the largest drop since March 2016) as they fell 0.7% month-on-month.

Howard Archer, chief economic advisor to the EY ITEM Club, comments: “Consumer price inflation fell back markedly to 0.8% in April, taking it to the lowest level since August 2016. This was down from 1.5% in March, 1.7% in February and a six-month high of 1.8% in January. Inflation had previously increased 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.

“The Office for National Statistics indicated that inflation is currently difficult to measure due to the restrictions caused by coronavirus. Specifically, the ONS commented “We identified 90 CPIH items (or 16.3% of the CPIH basket by weight) that were unavailable to consumers in the UK, as detailed in ‘Coronavirus and the Effects on UK Prices’; compared with the February 2020 index (the most recent ‘normal’ collection), we have collected a weighted total of 77.8% (excluding unavailable items) of the number of price quotes for the April 2020 index, although the coverage varies across the range of items.”

“Inflation was brought down by lower energy price inflation as the April 2019 increase in Ofgem’s electricity and gas price caps dropped out of the year-on-year comparison. Additionally, Ofwat introduced lower water and sewerage price caps from April."

“Inflation was also helped down in April by lower fuel prices. The price of petrol fell by 10.4p/litre between March and April compared to a rise of 3.8p/litre a year earlier. There were similar movements in diesel prices."

“Also within the transport sector, there was a marked downward impact from prices for transport services."

“Other significant contributors to lower inflation in April were clothing and footwear prices as well as miscellaneous goods and services. Increased discounting was evident for clothing."

“Some upward impact on inflation came from prices for recreation and culture goods."

“Core inflation moderated to 1.4% in April from 1.6% in March and 1.7% in February."

“At 0.8% in April, consumer price inflation was more than 1 percentage point below the Bank of England’s 2.0% target rate. This requires the Bank of England governor to write to the Chancellor to explain why inflation has fallen below the 1% band supposed to be maintained around the 2.0% target rate and what the central bank proposes to do about it.”

Outlook for Inflation

“Inflation is likely to fall further and the EY ITEM Club believes it could get as low as 0.3% over the summer."

“Low oil prices will limit inflation, along with weaker economic activity, in the near term at least. Brent oil fell to a near 21-year low of $15.93/barrel on 22 April. While it has since recovered to currently trade around $34/barrel, it remains at a relatively low level, having been as high as $65/barrel in late-January."

“Contracting UK economic activity amid restrictive lockdown measures is exerting downward pressure on prices, despite the supply side shock. Meanwhile, the near-term fundamentals for consumer spending appear to have taken a downturn as a result of coronavirus. Many people have already lost their jobs, despite the supportive government measures while others may be worried that they may still end up losing their job once the furlough scheme ends. Additionally, many incomes have been negatively affected. This is likely to keep consumers price conscious for some time, even when the economy starts to recover."

“Evidence of weak price pressures further down the supply chain in April was evident in producer input prices falling 5.1% month-on-month and 9.8% year-on-year. Meanwhile, producer output prices were down 0.7% year-on-year (the largest drop since March 2016) as they fell 0.7% 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. 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 overall to currently trade around $1.23 and 89 pence/euro.”