Home News Consumer Inflation in the UK and Europe Slips in February

Consumer Inflation in the UK and Europe Slips in February

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Written By: Adrian Moore – Forex Focus

A quick review of the February CPI numbers and expectations for the rest of the year

Consumer price inflation has remained a concern both in the eurozone and the United Kingdom. While in the UK, inflation has been lingering at the 3-percent mark for the last few months after climbing to 3.1 percent in November of last year, inflation in the euro area has remained a major concern, with the broad inflation numbers in February coming in at a meagre 1.1 percent. This in spite of crude oil prices near three-year highs. Even in the UK, where consumer inflation is holding near the central bank’s target of 3.0 percent, the dynamics leading to the rise are external in nature rather than due to internal demand.

With the UK-eurozone partnership expected to officially end in March 2019, the impact of external factors such as exchange rates are likely to continue at least into the first half of 2019 before domestic demand and supply take precedence.

Following is an analysis of the recent consumer-inflation figures in the UK and the eurozone, and the likely outcome for the rest of the year.

Consumer inflation in the UK

Annual consumer price inflation (CPI) in the UK eased to 2.7 percent in February from 3.0 percent the previous month. The February CPI numbers, which were announced on March 20, 2018, by the Office for National Statistics, came in at their lowest level since July of last year and also mark the first decline in the consumer inflation numbers below 3 percent since September of last year. Meanwhile, annual core inflation, which excludes volatile food, energy and alcohol prices, slipped to 2.4 from 2.7 percent during a similar period.

The key drivers leading to slower growth in the consumer inflation figures include transportation, food and non-alcoholic beverages, hotels, restaurants and recreation activities, while inflation registered a month-on-month uptick in utilities, clothing, footwear and miscellaneous goods and services. Month-on-month, consumer inflation rose by 0.4 percent in the latest reading, after slipping 0.5 percent in January.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH), the most comprehensive measure of inflation in the UK, increased at a measured pace of 2.5 percent in February of this year, compared to 2.7 percent in January, mainly on account of a decline in transport and food prices. CPIH costs in February were also at their lowest level in the last 11 months, as owner occupiers’ housing costs, which account for 17 percent of CPIH, slid to 0.2 percent in February from 0.43 percent the previous year.

Analysts expect consumer inflation in the UK to hold at around 2.8 percent in first quarter 2018, following which prices are expected to rise at a slower rate for the rest of the year. Based on median estimates, consumer price inflation in the UK is expected to average around 2.4 to 2.6 percent for the year.

According to the Monetary Policy Committee of the Bank of England, CPI inflation is expected to hover around 3 percent in the short-term as higher crude-oil prices coupled with the past depreciation of the pound sterling continue to weigh on prices. However, the bank expects domestic factors to take precedence once the external effects die down, leading to a downward spiral in the inflation numbers later in the year before gathering momentum in the next couple of years.

Consumer inflation in the eurozone

Consumer inflation in the eurozone rose at an annual pace of 1.1 percent in February of this year, the lowest since December 2016 and below the 1.3 percent reported the previous month. February’s numbers are also slightly below the flash estimates announced on February 28 and market consensus of 1.2 percent respectively. Annual core inflation, which excludes food and energy prices, however, remained unchanged at 1.0 percent during the corresponding period.

The decline in consumer inflation came against the backdrop of a slower than expected rise in the prices of processed and non-processed food items and a softer than expected increase in the prices of alcohol and tobacco. Energy prices rose at a 2.1-percent pace compared to the 2.2 reported the previous month, while prices of non-energy industrial goods remained flat at 0.6 percent. The services sector, however, bucked the trend with prices increasing by 1.3 percent in February compared with a 1.2-percent rise in January.

According to the European Central Bank (ECB), inflation is expected to rise at an annual pace of 1.5 percent in the first quarter of this year and 1.7 percent during the corresponding period in 2019. The figures are in line with the central bank’s projection of consumer price inflation made last year.

Independent analysts, however, differ with the projections of the ECB and expect the inflation rate to decline to around 1.0 percent in first quarter 2018 before picking up momentum from the second quarter to end the last quarter of the year at about 1.8 percent, averaging around 1.4 in 2018. The core inflation rate, on the other hand, is expected to average between 1.2 and 1.3 percent this year, higher than the 1.0 percent reported in 2017.

With the Bank of England announcing its decision to keep interest rates unchanged at 0.5 percent on March 22, 2018, analysts are keenly watching the central bank’s statements to glean information about when the bank is likely to push for a rate hike. With consumer inflation in February slipping below 3 percent for the first time in four months, the central bank is most likely to adopt a cautious approach, a fallback from the hawkish stance adopted last month.

With the ECB’s monetary-policy meeting out of the way on March 8 and the Governing Council indicating that interest rates will continue to remain at current levels for an extended period, the only uncertainty is how long Europe’s central bank will continue its monthly asset-purchase program, currently underway!

 

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