UK CPI inflation drops to 3.2% – reaction and analysis from investment strategists

by | Apr 17, 2024

The Office for National Statistics (ONS) has reported the latest UK CPI inflation data today, showing that prices rose by 3.2% during the year to the end of March 2024, compared to 3.4% the previous month. Market predictions had been for a greater fall.

However, with inflation now at its lowest level since September 2021, but still some way above the Bank of England’s 2% target, what might it mean for the next interest rate decision due in May? The BoE will be looking closely at these data, that’s for sure.

But what has the industry been saying in reaction to today’s inflation news? What does it say about the timing of interest rate cuts? We’ve compiled some of the reactions to today’s news as follows:

Commenting on today’s inflation data, Peder Beck-Friis, Economist, PIMCO, said: “Inflation surprised slightly to the upside in March, falling less than expected, though possibly in part distorted by the early timing of Easter. While the trend remains down, the pace of deceleration has slowed in recent months, with sequential inflation having stabilized at ~3% (annualised) in recent months.

“Following Powell’s comments yesterday, we don’t think a more hawkish Fed alone will meaningfully change the Bank of England’s (BoE) outlook. The BoE can – and will – diverge if domestic conditions warrant it. Granted, the reacceleration of U.S. inflation could be an early sign that similar dynamics could play out in the UK, too. But at this point in time, that is not our view. We still see the fundamentally different drivers between the UK and U.S. – growth in the UK is below trend, unlike in the U.S.; fiscal policy is tight in the UK, but not in the U.S. Consequently, we expect a gradual decline in UK inflation going forward.

We still think a mid-year rate cut is reasonable. However, this week’s data – showing slightly stronger wage growth and slightly higher inflation, combined with the reacceleration of U.S. inflation, is likely to reduce some of the pressure (and urgency) for some MPC members to vote for near-term rate cuts. As such, the risks of a later start to cuts have increased a bit. We maintain our view that UK gilts look attractive relative to U.S. Treasuries.

Commenting on the data, Tomasz Wieladek, chief European economist at T. Rowe Price, said:

“UK CPI inflation fell to 3.2% in March from 3.4% in February, with core inflation dropping to 4.2% from 4.5%, and CPIH inflation held steady at 3.8%. However, services inflation remained relatively sticky, falling to only 6% from 6.1%. This relatively strong reading for services inflation was higher than consensus expectations of 5.8%.

“These numbers are not easy to interpret, as a result of the early timing of Easter this year. Nevertheless, even accounting for Easter effects, it suggests underlying domestically generated inflation in the UK is significantly stronger than expected.

“Together with the rising momentum in wage inflation, the sticky services inflation numbers raise the risk the UK inflation battle is far from over and perhaps not yet won. The MPC will be worried about this scenario, and I believe this strong reading will make the MPC cautious about cutting early in the summer. Indeed, given these strong domestic inflationary pressures in both wages and services, the MPC will now likely wait until late summer to get the required confidence to cut rates.

“However, there is another risk that is not yet spoken about in the UK monetary policy debate. If services inflation and wages continue to remain persistently at these high levels, the risk the Bank of England will have to hike this year is rising. After all, the Bank of England is data-dependent. If the data continue to indicate policy is not tight enough to bring inflation back to target, the MPC may have to tighten policy further.”

Lindsay James, investment strategist at Quilter Investors said: “UK inflation has fallen to 3.2%, slightly less than forecasted, down from 3.4% in February, in a data release that will be reassuring to the Bank of England and leaves rate cuts on the table in the near term. Last month saw a slightly faster than expected decline which initially drove gilt yields lower, however since then we have seen continued signs of a strong US economy along with higher than expected US CPI – which has pushed back expectations of rate cuts in the US and in the UK too, with the markets expectation that the BoE will be reluctant to move in a different direction from the Federal Reserve, due to the risk of devaluing the pound and hence triggering a further inflationary pulse.

“This effect has seen the market price in less than two rate cuts in the UK by year end, approximately one fewer than a month ago despite the improving inflation data. This latest inflation number may question this as the Government heads into the election banking on interest rate cuts feeding through to the real economy.

“With a slightly weak UK labour market report out earlier this week, showing unemployment has ticked up from 3.9% to 4.2% even as wage inflation continues to run hot, this is one signal that tight monetary policy is having an economic impact. However, with oil prices up around 16% since the start of the year, as tensions continue in the Middle East, investors will need to weigh the wider global picture rather than extrapolating policy from CPI data alone.

“Whilst rate cuts may therefore still be a little further away than investors expected at the start of the year, reassuring levels of global growth and broadly declining inflationary forces should ultimately dominate the market direction in months to come.”

Rob Clarry, Investment Strategist at wealth manager Evelyn Partners, comments:

“The services component of CPI inflation remains elevated at an annual 6.0%, which was above the 5.8% expected – and the Bank of England will want to see more progress on this measure before they commit to a rate cutting cycle.

“Despite softer domestic conditions, the Bank’s monetary policy committee will be wary about cutting in the face of higher US interest rates. As a smaller but open economy, the UK is exposed broader global economic forces, and this has been on display in recent weeks as US bonds yields have risen amidst sticky inflation, which has placed upward pressure on UK government bond yields.

“Cutting interest rates in this environment would likely lead to sterling deprecation, which would, in turn, lead to higher import prices and put upward pressure on UK inflation. As we enter the summer months, the Bank will continue to face a difficult balancing act between growth on one side and inflation on the other.

“The largest downward contribution to the monthly change in inflation came from food, with prices rising by less than a year ago, while the largest upward contribution came from motor fuels, with prices rising this year but falling a year ago.

“But there are signs that domestic conditions will favour easier monetary policy in the coming quarters. February’s labour market data showed a marked weakening, with a 156,000 contraction in employment, which was well below the expectation of a 58,000 increase. The unemployment rate also rose from 3.9% to 4.2%.    

“On the growth side, the data are showing signs that activity has improved in recent months, but from a low base. The UK composite PMI reading for March was 52.8, marking the third month in a row above 50 (50 signals expansion vs the previous month). This implies that the technical recession experienced in the second half of 2023 is now over. However, growth is likely to remain sluggish through the remainder of this year, particularly given labour market weakness. 

“The recent run of data has changed the calculus for money market traders: the probability of a June rate cut has fallen from 70% last month to around 20% today. Post this CPI report, sterling gained vs the US dollar and gilt yields increased across the curve.

“We continue to expect the first rate cut around the middle of the year, although rising US bonds yields are challenging this view.”

Andrew Oxlade, investment director, Fidelity International, said:

The March Consumer Prices Index figure of 3.2% was down from 3.4% in February – a relief for the Bank of England but slightly less than the 3.1% analysts had hoped.

“The broad picture is positive. The headline CPI figure has been regularly falling and is a fraction of its painful peak of 11.1% in 2022. But falls in late 2023 have largely been incremental and slower than hoped – a reminder that when fighting inflation, the last part is the hard part. 

“All the time the figure hovers so far above the target of 2%, policymakers will find it hard to justify cutting rates. The shift in rate expectations reflects this. In January, markets had expected six rate cuts in 2024 and that the first would have happened by now. Predictions today point to only two cuts, from 5.25% to 4.75 with the first not arriving until autumn.

“The good news is that shoppers should be seeing slower rises and may soon begin to notice some prices falling, at least in pockets. The price of furniture, for example, in March was 2.3% lower than a year before. More broadly, the picture is that inflation in services remains much higher than goods – 6% versus 0.8%.

“Attention will now turn to the impact of rising oil prices, driven higher by the crisis in the Middle East. It could further slow reductions in inflation, and further push out hopes of rate cuts even if they are much needed by a weak British economy.”

Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) said:

“UK inflation came in stickier than expected today, news that the Bank of England was not hoping to hear. Part of this upside surprise came from a rise in the price of motor fuels, driven by OPEC+ supply cuts and elevated geopolitical tensions in the Middle East. More concerning for the Bank, however, is the stickiness we continue to see in wage data and services inflation, pointing to signs of deeper inflation persistence.

“The 10% increase in the National Living Wage introduced on 1 April may lead to a broader firming in wage growth across the economy and will be a key watch item for the Bank over the next few months. While the Bank should feel able to take its foot off the brake this summer given considerable progress has been made on inflation at the headline level, if these signs of deeper persistence continue, the pace of further rate cuts may be slow and the magnitude limited.”

Falling inflation paves the way for a summer rate cut according to Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments: “Today’s consumer price index figures from the ONS show that UK inflation fell to 3.2% in March. Food, restaurant, hotel and recreation prices have risen more slowly than this time last year, although an early Easter resulted in a spike in airfares.  

“Price pressures are easing slowly, though they still remain close to the Bank of England’s interim target levels. Nonetheless, the Bank will be encouraged by the dip in service sector prices and hopeful of easing wage pressures in response to an already loosening labour market in the months to come. 

“The abating of inflation, which is predicted to continue over the course of the spring, should provide justification for the Bank to finally begin to lower interest rates, after holding them for six consecutive meetings.

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