Inflation prospects improving as sterling weakness abates
Simon Ward
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Earlier posts argued that the MPC and consensus were underestimating the inflationary impact of exchange rate weakness (e.g. here). Recent figures have indeed been worse than expected: annual CPI inflation averaged 3.0% in the first quarter versus a 2.7% projection in the February Inflation Report. The MPC will reportedly revise up its forecasts in the May Report released on Wednesday.
However, stability in sterling's effective index since late 2008 – if sustained – promises a reduction in imported inflationary pressures later this year. The annual increase in manufactured import prices may already have peaked at 16% in December (March figures are due tomorrow) – see first chart. Base effects suggest a big slowdown in late 2009 barring another sterling accident.
April CPI numbers next week will benefit from cuts in household energy tariffs. In addition, the British Retail Consortium's food and non-food price indices registered lower rates of change in April than March and correlate reasonably closely with the corresponding CPI goods components – second chart. Slower food price gains were also suggested by April producer input cost numbers – third chart.
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