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Sterling dips after United Kingdom inflation slows more than expected

21 March 2018

The largest downward contribution was transport and food prices, which rose by less than a year ago while prices for accommodation also dropped.

The sharp fall in the value of the pound following the UK's vote to leave the European Union in the summer of 2016 has raised the cost of imports and pushed up the rate of inflation.

Phil Gooding, ONS head of CPI, said: "A small fall in petrol prices alongside food prices rising more slowly than past year helped pull down inflation, as numerous early 2017 price increases due to the previous depreciation of the pound have started to work through the system".

South African inflation eased to 4.0 percent in February from 4.4 percent seen in the previous year. Those forecasts now appear to be materialising, with inflation dropping 0.3 percentage points in the month, a significant fall.

Today's fall will ease the pressure on squeezed households and substantially reduces the likelihood of another interest rate rise.

Petrol prices dropped by 0.2 pence a litre to 120.8 pence a litre on the month, while diesel slipped by 0.1 pence a litre to 124.4 pence.

Month-on-month, consumer prices increased 0.8 percent in February, slightly slower than the expected 0.9 percent.

Screen Shot 2018 03 20
Office for National Statistics

"This fallback in inflation therefore provides little reason for the Bank of England to hold back from gradually raising interest rates", said Andrew Sentance, a former BoE rate-setter who is now an economic adviser with accountancy firm PwC. The economists expect the data to show acceleration of growth to an annual rate of 2.6% in the three months to the end of January.

And the situation could improve further this year, according to the Bank of England.

"This does make any increase in interest rates during the next few months less likely", he said.

The ONS figures published on Tuesday suggested less pressure in the pipeline for consumer prices.

Food and non-alcoholic beverages prices rose 3.9 percent annually and alcoholic beverages and tobacco prices climbed 6.1 percent.

The Consumer Prices Index including owner-occupiers' housing costs (CPIH) - the ONS' preferred measure of inflation - was 2.5 per cent last month, down from 2.7 per cent the month before. The BoE expects pay to rise faster than prices. It is also higher than in the United States, where the Federal Reserve looks set to continue its series of interest rate hikes this week. This perception will be key to expectations for the next Bank of England interest rate rise and the performance of Pound Sterling in the short term.

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Sterling dips after United Kingdom inflation slows more than expected