Consumer & Producer Prices (Apr.) - Capital Economics
UK Economics

Consumer & Producer Prices (Apr.)

UK Data Response
Written by Ruth Gregory

The energy-driven slump in inflation in April is unlikely to concern the Bank of England much, but it might find the easing in underlying price pressures a little harder to ignore. And with the figures triggering the first in what we expect will be a series of letters from the Governor of the Bank of England to the Chancellor explaining why CPI inflation is more than 1ppt below the 2% target, the pressure on the MPC to loosen monetary policy further is likely to grow.

Easing price pressures suggest the Bank has more work to do

  • The energy-driven slump in inflation in April is unlikely to concern the Bank of England much, but it might find the easing in underlying price pressures a little harder to ignore. And with the figures triggering the first in what we expect will be a series of letters from the Governor of the Bank of England to the Chancellor explaining why CPI inflation is more than 1ppt below the 2% target (due to be published by 16th June) (see Chart 1), the pressure on the MPC to loosen monetary policy further is likely to grow.
  • The slump in CPI inflation from 1.5% in March to 0.8% in April (consensus 0.9%; CE 0.8%) was the biggest drop since December 2008 and left inflation at its lowest since August 2016. This was almost entirely due to temporary energy effects, as fuel inflation slipped from -2.4% to -12.2% and utility inflation dropped from 3.9% to -6.8% (due to the decline in Ofgem’s price cap). There was a partial offset from food inflation, which rose from 1.1% to 1.3%, reflecting higher inflation for vegetables, meat and fish.
  • However, underlying price pressures also eased. Admittedly, the breakdown showed a slight rise in inflation in one or two of the core goods sectors, such as games, toys and hobbies and computer software. But these movements were offset by big falls in clothing inflation, jewellery, and travel goods. This caused the core measure (excluding food, alcohol, and energy) to slip from 1.6% to 1.4% in April. Meanwhile, the producer price figures showed that output prices dropped into deflationary territory for the first time since June 2016. This should feed through to lower goods prices on the high street in time.
  • Admittedly, the Office for National Statistics had to replace prices for items that lockdown made unavailable with assumptions based on other prices. This means that the downward influence from energy prices will have crept into core prices, particularly air and coach fares which together subtracted about 0.1ppts from total inflation. And changes to consumption patterns raise questions about the validity of the CPI basket when around 16% of goods and services are not available to purchase.
  • Even so, once the lockdown ends, we expect core inflation to remain extremely subdued, as demand takes time to recover. Against this background, it seems increasingly likely that the Bank will, at the very least, expand its quantitative easing programme further.

Chart 1: CPI Inflation (%)

Sources: Refinitiv, Capital Economics

Table 1: Consumer Prices

CPI

RPI

CPIH

Index

% m/m

% y/y

Core % y/y

Fuel % y/y

Food % y/y

Index

% m/m

% y/y

(% y/y)

Jan.

108.2

-0.3

1.8

1.6

4.7

1.1

290.6

-0.4

2.7

1.8

Feb.

108.6

0.4

1.7

1.7

2.8

0.8

292.0

0.5

2.5

1.7

Mar.

108.6

0.0

1.5

1.6

-2.4

1.1

292.6

0.2

2.6

1.5

Apr.

108.5

-0.2

0.8

1.4

-12.2

1.3

292.6

0.0

1.5

0.9

Source: Refinitiv


Ruth Gregory, Senior UK Economist, +44 7747 466 451, ruth.gregory@capitaleconomics.com