World Business Press Online

UK inflation is expected to decelerate further in February, as downside inflationary pressures in the medium-term intensified on stronger sterling against the euro.

Inflation in the UK has been slowing sharply in the last six months, as steep declines in the global prices of crude oil and food have continued to translate into lower production costs and weaker consumer prices at home. What is more, the Bank of England (BoE) now sees increased downside risks to medium-term inflation, as sterling's appreciation against the euro is set to add further downward pressure on inflation.

In February, the annual Consumer Price Index (CPI) measuring inflation is expected to have slowed to 0.1%, down from 0.3% a month before. The core inflation, which excludes the volatile prices of energy and food, is also estimated to have eased to 1.3% from 1.4% in January. The Office for National Statistics (ONS) is releasing February CPI data on Tuesday, 9:30 am GMT.

In his most recent speech, given at the Durham University Business School, the BoE rate-setter Ian McCafferty said inflation was to "flirt" with zero either in March or April, as the effect of falling oil prices earlier this year was set to reach its maximum during those two months. This suggestion goes in line with the BoE's latest forecast, which showed inflation was to fall to zero, or even below, in the first half of this year and then float close to that level for the rest of the year.

Referring to the oil price falls dropping out of statisticians' calculations at the end of this year, McCafferty said "such price-level shocks affect the price level permanently, but have only a temporary effect on the rate of inflation."

When asked if the BoE should ease monetary policy further in order to offset low inflation, Governor Mark Carney said it would be "extremely foolish" to be in a hurry to boost inflation now.

"The thing is that it would be extremely foolish to try to lean against this oil price fall today … because the impact of that extra stimulus .... would happen well after the oil price fall had moved through the economy and we would just add unnecessary volatility," Carney said told UK lawmakers on March 10.

BoE Sees Increased Disinflation Risks From Sterling Appreciation

Longer-term deflationary forces "might become more persistent," driven by the risk that divergent monetary policy trends, as well as stronger prospects for growth in the UK than in the euro area, might continue to put upward pressure on sterling's exchange rate, primarily versus the euro," the minutes from March meeting of the Monetary Policy Committee (MPC) revealed last week.

The BoE policymakers consequently lowered the medium-term outlook for inflation saying "the combination of the increase in the price of oil and appreciation of sterling that had occurred over the month was expected to leave the path of inflation broadly unchanged in the near term, but little lower further ahead."

On domestically generated price pressures, the MPC judged that "a further sustained increase in labour cost growth would probably be necessary for inflation to rise to the 2% target in the medium term, after the temporary impacts on inflation of movements in energy and food prices had faded."

In its March minutes, the BoE said the outlook for labor costs remained defined by two opposing forces. One is that a lower jobless rate could push up inflation in the medium term. On the other hand, significantly weak inflation may translate into lower inflation expectations and those could lead to suppressed wage growth.

UK rate cut possible: Haldane

Given that the risks to inflation outlook remain broadly balanced on both the upside and downside, the BoE chief economist and rate-setting committee member Andrew Haldane said last week there was a scope for either a cut or a rise in the base interest rate to offset those risks.

"In other words, my view would be that policy may need to move off either foot in the immediate period ahead, depending on which way risks break," Haldane said, while adding that if downside risks to inflation were to materialize, the case for easing policy today would strengthen. Haldane added this was his own interpretation rather than the MPC's central view on the future path of interest rates. At the moment, Haldane said he did not "see an immediate case for a policy change in either direction."

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