The headline rate of UK inflation has slowed, dipping to 3.4%, according to data released this morning.
This figure is marginally below market forecasts, having hit a 17-month high in April. As a result, there has been a knee-jerk sell off in the pound as the prospects for an early interest rate rise ebb further away. The Bank of England has been persistent in holding its line that inflation will begin to fall, despite its continued rise over the past six-months. Today’s figure will certainly come as a relief for the Governor, whose stance was becoming increasingly undermined.
Duncan Higgins, senior analyst at Caxton FX explains, “Mervyn King can perhaps now breathe slightly easier. Pressure was mounting, and officials were beginning to speak out about the unnerving rate at which inflation was rising. Today’s figure may be the turning point that the Governor was looking for and inflation may now begin to steadily fall back.”
The VAT rise back in January had been one of the leading factors behind the rise in prices. With its influence now coming to an end, spare capacity in the economy is putting downward pressure on inflation.
“Temporary factors driving prices higher are now beginning to fade and spare capacity should become increasingly important, helping to put inflation on a downward path,” continues Higgins.
The troubles in Europe will also weigh on prices. “As economic growth slows in the eurozone, demand for UK exports will weaken, driving prices back down.”
Although the headline remains some way above the 1.0% leeway afforded to the Bank, sterling has come off its highs.
Duncan Higgins concludes, “There is now likely to be far less pressure to prematurely raise interest rates. Headline inflation still has some way to fall before meeting the 2.0% target, but it appears that factors applying upward pressure are now subsiding.”
The pound has weakened to sit at €1.2050, and has dropped back from its intra-day high to trade marginally above $1.47 against the US currency.
