UK Preview: UK Annual CPI Expected to Decline Despite Monthly Gains

(CEP News) - Although consumer prices in the UK are expected to post modest monthly gains in March, economists anticipate a sharp decline in the country’s annual inflation rates, which has failed to materialize thus far.

The consensus is for a 0.2% month-over-month gain in March CPI following a 0.9 increase in February, resulting in an annual inflation rate of 2.9%, down from the previous month’s 3.2% level.

While the report has shown recent upside surprises in the country’s inflation rates, economists have remained firm in their expectations for a sharp deterioration in the country’s prices as a deteriorating economy ravages spending.

The UK inflation report has “surprised on the upside in recent months, potentially reflecting an earlier and stronger feed-through from the weaker sterling than we had anticipated,” according to Morgan Stanley economist Melanie Baker.

Nevertheless, she expects “further significant decline in year-on-year inflation on both measures in coming months, bottoming out in early Autumn.”

Indeed, in his most recent letter to the Chancellor of the Exchequer, Bank of England Governor Mervyn King told the House of Commons’ Treasury Select Committee that while the pound’s depreciation poses an upside inflation risk, he does not expect the falling currency to push inflation above target levels.

Meanwhile the retail price index is expected to decline 0.2% month-over-month, its first decline since the 1960s, and following from a 0.6% gain in February, making for an annual inflation rate of 1.5% versus the previous 1.6% level.

“February’s consumer prices figures were something of an anti-climax after the much-anticipated drop in RPI inflation below zero failed to arrive,” according to a report from Capital Economics. Nevertheless the firm expects both RPI and CPI to head south in March after declines in mortgage rates and energy prices over the month.

Economists at Citigroup continue to expect UK inflation to ease, despite a “false alarm” in February when CPI rose.

“[T]hese data may finally show Y/Y RPI inflation turning negative for the first time since the early 1960s,” they wrote. “Substantial further declines in Y/Y RPI inflation lie ahead this year, although CPI inflation is unlikely to turn negative in any meaningful way.”

Danksebank Chief Analyst Allan von Mehren said, however, that markets are likely to ignore Tuesday’s CPI release. “We doubt inflation data will have a strong impact as there are neither signs of inflation nor deflation currently,” he said.

The UK inflation report will be released on Tuesday morning at 4:30 a.m. EDT.

By Erik Kevin Franco, efranco@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca

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Posted in Categories: Economy, Eurozone, Releases, UK, USA.