UK Inflation Tipped to Fall Below 2.0% By April by ING
- Written by: Gary Howes
Image © Adobe Images
UK inflation is likely to fall to 2% and temporarily dip below that level by April, according to ING.
ING says the rise in headline CPI to 3.4% in December from 3.2% should not be interpreted as a renewed inflation problem, arguing that underlying pressures continue to ease.
"We expect headline CPI to get to 2% and even temporarily dip below in April. That should unlock further rate cuts in March and June, earlier than markets expect," says James Smith, Developed Markets Economist at ING.
He says the latest rise in UK inflation - from 3.2% to 3.4% in December – shouldn’t last as food prices prove overstated.
"The fear has been that higher supermarket prices are very noticeable for consumers and risk fuelling a surge in inflation expectations and a more persistent bout of price pressure," says Smith. "Those fears look overblown."
Above: Chart from ING showing UK food prices should track Europe lower.
ING thinks UK food inflation should follow the rest of Europe lower in coming months.
The bank expects a more decisive improvement in UK inflation trends from April, when a range of annually updated service prices reset.
"We already know that last year’s 25% rise in water and sewerage won’t be replicated to anywhere near the same extent this year," Smith says.
The absence of another increase in vehicle duties and other more subdued price adjustments should also help, according to the analysis.
"That and other more muted price rises this year should bring services inflation down from 4.5% in December to around 3% post-April," says Smith.
Based on the deterioration in UK labour market data, ING thinks the Bank of England will be comfortable cutting rates in March.
"Then if we’re right about the April inflation data, it should feel able to cut rates again in June," the bank says.
