UK headline CPI inflation decelerates in April on drop in air fares and clothing prices

UK’s headline CPI inflation in April decelerated to 0.3% y/y from March’s 15-month high of 0.5% y/y and below consensus expectations of 0.5%. The slowdown was mainly due to reduction in air fares and clothing prices. Airfares fell sharply by 14% in April, following a rise in March due to early Easter holidays. April’s core inflation slowed to 1.2% from March’s 1.5%. Core inflation also came in below consensus expectations of 1.4%.

Solid wage pressures, along with a waning drag from oil prices and lower non-energy import is expected to accelerate inflation through 2016 if the UK stays in the EU, said Nordea Bank in a research note. Hence, the headline CPI inflation is expected to surpass the barrier of 1% later in 2016. But the latest signs of persistent slowdown in demand in the second quarter imply that the rise in inflation might be a slower pace than anticipated earlier. Therefore, core inflation is unlikely to reach the levels in line with the central bank’s 2% target rate until the beginning of 2017, according to Nordea Bank.

If the monetary policy continues to work with a lag, the Bank of England is likely to first raise rate by the end of 2016, if Brexit does not happen. However, the subdued inflation report for April emphasizes that the threat to this forecast is tilted towards a hike afterwards around February 2017, added Nordea Bank.

Currently, the EU referendum continues to blur the outlook for everything. Markets anticipate a 30% probability of a rate cut by late 2016 due to the uncertainty regarding Brexit. Markets are not entirely pricing a rate cut until 2019.