In March CPI inflation took the first leg of what we suspect will be a sustained journey down to around 0.5% by the summer, easing from 1.7% in February to 1.5%.
CPI inflation starts to slide
- In March CPI inflation took the first leg of what we suspect will be a sustained journey down to around 0.5% by the summer, easing from 1.7% in February to 1.5% (consensus forecast 1.5%).
- The fall in CPI inflation in March was partly due to the collapse in oil prices and partly due to falls in clothing, hotel and restaurant inflation, which may well be an early sign of consumer caution.
- The drop in the oil price from $60-70 per barrel a year ago to $25 in March triggered a fall in fuel price inflation fell from +2.8% to -2.4%, which took 0.16ppts off CPI inflation. (See Table 1.) If oil prices stay around current levels of $20 per barrel, as opposed to recovering to $45 as we had assumed, it would take an extra 0.3ppts off inflation this year raising the risk that inflation falls all the way to zero. (See Chart 1.)
- Despite the fall in fuel prices, inflation in the transport category only fell from 1.8% to 1.3% (taking 0.07ppts off CPI inflation) as inflation in train tickets and airfares rose. But the increase in airfares inflation from -1.4% to +10.1% was based on flights that were cancelled later. Our hunch is that airfares will fall in the coming months but with few flights taking place big swings in ticket prices are possible.
- Meanwhile, the fall in clothing inflation from +0.2% to -1.2% (detracting 0.09ppts from inflation) and hotel inflation from +1.0% to -0.5% (taking 0.03ppts off) are probably early signs of consumers cutting their spending as a result of less social interaction because of the coronavirus even before the lockdown began (the data was collected on 17th March). And there was no sign of an offsetting boost to inflation from stockpiling, as food price inflation only rose from 0.8% in February to 1.1% in March.
- We suspect a larger fall in CPI inflation, from 1.5% to 0.9%, is in store in April as Ofgem lowers the cap on utility bills to reflect past falls in wholesale energy prices. And our forecast is that the disinflationary pressure of weak demand in the aftermath of the coronavirus recession due to the fall in employment and consumers remaining cautious will add to the downward influence from very low energy prices, pulling inflation down to just 0.5% in the second half of this year.
Chart 1: Brent Crude Price & Contribution to CPI Inflation from Fuel Prices
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Andrew Wishart, UK Economist, +44 7427 682 411, email@example.com