Danske Research Team
Danske Bank A/S
UK CPI inflation declined to 0.0% y/y in February, down from 0.3% y/y in January (Danske Bank 0.2% y/y, Consensus 0.1% y/y). This is a new historical low and we are expecting inflation to go below zero in March. In other words, ‘deflation’ is approaching in the UK. Core inflation declined from 1.4% in January to 1.2% in February. Although underlying inflation is low too, the figure still indicates that there are limited deflationary tendencies.
As expected, fuel prices still explain why inflation is so low but did not pull the rate down further in February. However, the energy component still dragged down inflation by 0.04pp, as ‘electricity, gas and miscellaneous energy’ fell by 0.4% m/m in February. We expect this component to pull inflation down below zero in coming months, as most British gas companies have announced price cuts.
Food prices fell further in February and the component ‘food, alcohol and tobacco’ lowered inflation by an additional 0.06pp.
The main contributor to the further fall in CPI inflation was non-energy industrial goods, which cut inflation by 0.2pp. There is downward pressure on non-energy industrial goods from the appreciation of sterling.
Service inflation was unchanged at 2.4% in February. It contributed 1.1pp to CPI inflation. This suggests that inflation is held down by external factors.
That the UK is approaching negative inflation does not surprise the Bank of England (BoE). In its latest Inflation Report from February, the BoE recognised that CPI inflation is likely to fall below 0% and stay very low for the rest of year. However, this is due mainly to falls in food and energy prices, which should begin to drop out at the end of the year. BoE Governor Mark Carney has stated that it would be ‘foolish’ to add further stimuli as the very low inflation is due mostly to temporary factors and monetary policy works with a lag. We still expect the BoE to raise rates despite low inflation if the medium-term inflation outlook calls for tighter monetary policy. However, the minutes from the BoE’s Monetary Policy Committee (MPC) meeting in March revealed that the MPC has become more worried about the appreciation of sterling. The combination of subdued wage growth and a strong sterling could postpone the first hike.
See the following page for illustrative charts.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD holds below 1.0750 ahead of key US data
EUR/USD trades in a tight range below 1.0750 in the European session on Friday. The US Dollar struggles to gather strength ahead of key PCE Price Index data, the Fed's preferred gauge of inflation, and helps the pair hold its ground.
USD/JPY stays firm above 156.00 after BoJ Governor Ueda's comments
USD/JPY stays firm above 156.00 after surging above this level on the Bank of Japan's decision to leave the policy settings unchanged. BoJ Governor said weak Yen was not impacting prices but added that they will watch FX developments closely.
Gold price oscillates in a range as the focus remains glued to the US PCE Price Index
Gold price struggles to attract any meaningful buyers amid the emergence of fresh USD buying. Bets that the Fed will keep rates higher for longer amid sticky inflation help revive the USD demand.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
US core PCE inflation set to signal firm price pressures as markets delay Federal Reserve rate cut bets
The core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is forecast to rise 0.3% on a monthly basis in March, matching February’s increase.