UK Inflation Plunges in April As Covid-19 lockdown Hits Oil Prices

Intermediate
  • Headline inflation lowest in over three years
  • Falling energy and fuel prices account for majority of slump
  • Analysts expect UK inflation to approach zero over the summer
  • Job losses to subdue wage inflation for the medium-term
  • GBP drops further on lower-than-forecast CPI

London, 20 May 2020 (LS NEWS) – The UK’s main rate of inflation plunged to its lowest level in nearly four years on cheaper fuel and energy prices and another large decline in raw material costs.

Annual consumer price growth in April fell to 0.8pct from 1.5pct in March, and the core index slipped to 1.4pct from 1.6pct.

The Office for National Statistics favoured reading-CPIH-printed 0.9pct year-on-year versus March’s 1.5pct. On the month, headline CPI fell two-tenths of a percent to -0.2pct in April.

Jonathan Athow, the deputy national statistician for economic statistics at the ONS, said: “While the coronavirus limited the availability of some goods and services, its effect on prices was more muted. Falling petrol and diesel prices, combined with changes to the domestic energy price cap were the main reasons for lower inflation in April.”

The dramatic fall in global oil prices served as a major factor in the decline of inflation, with base affects playing a part. The contribution of household energy prices to inflation lessened as last year’s increase in the energy price cap fell out of the annual comparison.

Significant negative price effects also came from transport services and clothing, the ONS said.

Increasing costs in a number of areas helped offset a deeper drop. “Games, toys and hobbies saw rising prices, perhaps as people occupied their time at home. Food prices grew no more quickly than other goods and services, though fresh vegetables did see stronger rises,” Athow explained.

Cathal Kennedy, European economist for RBC Europe, said: “Electricity and gas price rose 10.9pct month-on-month and 9.3pct month-on-month, respectively, in April 2019, as the price cap was lifted. This year’s introduction of the price cap on 1 April saw electricity prices rise by 0.2pct and gas prices 3.5ct month-on-month.”

Pipeline inflation continues decline

Factory gate inflation was also weighed by global oil price falls. The ONS said the headline rate of output price growth for goods leaving the factory gate was -0.7pct on the year to April, down sharply from 0.3pct in March.

Input prices were also capped by the falling cost of crude. The cost of materials and fuels used in manufacturing fell 9.8pct annually, down from a decline of 3.1pct last month. On the month, producer price input inflation was -5.1pct versus -3.8pct in March. According to the ONS, this was the lowest rate since records began in January 1996.

Looking further out, the potential for a reversal in the current inflationary slide seems limited. Yesterday’s UK jobs report showed a strong start to the first quarter for the labour market. However, with only a week’s worth of lockdown included with in the reporting period, this picture will undoubtedly change.

The ONS said Tuesday that reported total earnings growth fell to 2.4pct annually in March, down from 2.8pct in February. Rolls Royce today announced 9,000 redundancies, with more companies expected to layoff workers in the coming months. This all points to subdued wage pressure ahead.

Five Pound Note up close

Where does this leave the BoE?

RBC’s Kennedy said, “In the most recent MPR*, the Monetary Policy Committee (MPC) saw CPI falling to 0pct by the end of this year. We think that weakness of demand foreseen in the MPR and the threat of CPI inflation reaching 0pct will see the MPC add more stimulus at their next meeting, when we expect a £200bn expansion of QE to be announced.”

*Monetary Policy Review (May 2020)

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