UK’s February inflation remained at January’s print of 0.3% y/y, as compared with the expectations of an acceleration to 0.4%. The core rate, excluding tobacco, alcohol, food and energy, and RPI inflation also remained the same at 1.2% and 1.3% y/y respectively. The unchanged headline rate for February was largely because of downward contribution from transportation, including used cars and bicycles, which broadly countered the upward contributions from restaurants, food and hotels.
The pass-through from the drop of 8% in trade-weighted sterling since November 2015 might have supported the upward contribution by foods, hotels and restaurants. It is likely that service sector companies might have begun adjusting their prices before the introduction of the National Living Wage in April.
Overall, today’s print highlights the challenges faced by the MPC to accelerate inflation, particularly with April and March cuts in utility prices expected to pose further headwinds to their expectation of a gradual rise in annual inflation towards 1% by the end of 2016. However, underlying domestic cost pressures are likely to re-emerge towards the end of spring and encourage a resumption of the recent uptrend.
