U.K. headline inflation decelerates in March, likely to slow down sharply in April

The U.K. headline inflation rate slowed down for the second straight month in March. On a year-on-year basis, the inflation rate decelerated to 1.5 percent from the prior month’s 1.7 percent, coming in line with consensus expectations.

Prices for the March data were collected around the 17th March, ahead of the formal government lockdown that was introduced on the 23rd and should not be affected by COVID-19, noted Lloyds Bank in a research report. Nevertheless, the ONS stated that some changes in pricing behavior might be because of changes in retailers’ expectations of the potential effect from social distancing measures and the possibility of spending patterns shifting towards food and other necessities.

Some of the signs for this were clear in some ‘core’ areas of the CPI basket. Clothing prices dropped 0.7 percent last month, compared with a rise of 1 percent in March 2019. On the other hand, prices at hotels and restaurants rose only 0.1 percent, as compared with the 0.4 percent rise seen in March of 2019. Combined these effects accounted for much of the fall in the annual rate of ‘core’ CPI inflation, which slowed down to 1.6 percent year-on-year from 1.7 percent previously.

The decline in global oil prices was the other major drag on the headline inflation in March. Motor fuel prices dropped 4 percent last month, in response to the fall – an effect which is expected to further drag on UK inflation in months ahead, said Lloyds Bank. Petrol/diesel prices are already on track to have fallen a further 8 percent in April – which along with reductions in regulated prices – means that the annual inflation rate is almost certain to decelerate sharply in April, most likely falling below 1 percent.

“In the coming months, it is likely that a combination of influences will see a number of UK data releases exhibit significant distortions in the coming months. Not only, from changes in behaviour caused by the implementation of measures to contain the virus, but also in the collection of the data. According to the ONS, around 40% of prices are gathered manually”, added Lloyds Bank.