Another surprise fall in UK inflation muddies Bank of England rates message

LONDON (Reuters) – British inflation fell unexpectedly in April, according to figures on Wednesday that added to doubts about when the Bank of England will raise interest rates again and pushed sterling to its lowest level against the dollar this year.

FILE PHOTO: A shopper reaches to a high shelf in an Aldi store in London, Britain February 15, 2018. REUTERS/Peter Summers/File Photo – RC19A7E7B0A0

Consumer price inflation cooled to 2.4 percent last month, its weakest increase since March 2017, and down from 2.5 percent this March.

The figure was below economists’ average expectation in a Reuters poll for it to hold steady at 2.5 percent and represented the second surprise fall in a row after a drop in March’s figures.

“It’s a conundrum for the Bank of England which has struggled to read the direction of price changes recently,” Ed Monk, associate director for personal investing at fund manager Fidelity International, said.

“With inflation trending lower, it only makes it harder for the Bank of England to raise rates.”

Investors were now pricing in a one-in-three chance of a BoE rate hike in August — the next time it updates its forecasts on the economy — down from 50/50 before Tuesday’s data.

High inflation, caused by the pound’s drop after the 2016 Brexit vote, squeezed British consumers through last year, and although it has receded from its December peak of 3.1 percent, the BoE is keeping a close eye on price pressures.

PIPELINE PRESSURE

Wednesday’s data pointed to some signs of inflation pressure still in the pipeline.

Prices of goods leaving British factories increased at a faster rate than expected last month. And while consumer price inflation cooled again, the timing of the Easter holidays and their impact on air fare prices was a big contributor.

On Tuesday Bank of England Governor Mark Carney cited a new sugar tax on soft drinks, as well as higher utility bills and petrol prices, as reasons why inflation “probably tips up a bit” in the coming months before resuming a decline.

The ONS said soft drink prices increased sharply over the last couple of months but the overall impact on inflation was minimal.

The latest data on prices in British factories, which eventually feed through onto the high street, were stronger than anticipated.

Manufacturers increased the prices they charged by 2.7 percent year-on-year, matching March’s increase. Economists had expected a fall to 2.3 percent.

Among manufacturers, the cost of raw materials — many of them imported such as oil — was 5.3 percent higher than in April 2017, up sharply from an increase of 4.4 percent in March and suggesting a long run of weakening price growth has ended.

A surprise drop in consumer price inflation in March, along weak economic growth figures for early 2018, had called into question whether the BoE would raise interest rates more than once before the end of the year.

Earlier this month it refrained from an interest rate hike that had at one point been widely expected.

The BoE’s latest forecasts show inflation dropping to 2.1 percent in a year’s time, and returning to its 2.0 percent target a year later — but only if interest rates rise by 25 basis points about three times over three years.

The latest Reuters poll of economists suggests the BoE is most likely to raise interest rates at its August meeting.

Editing by Catherine Evans

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