The fall in annual CPI inflation from 3.5% in March to 3.0% in April was slightly smaller than projected here – a 2.9% April print had been expected – and reflects a favourable “base effect” (i.e. an unusually large monthly CPI rise in April 2011 dropping from the 12-month calculation). Motor fuel price relief could maintain the headline rate at 3.0% in May, allowing a welcome suspension of the King / Osborne letter-writing charade. Shorter-term “core” price momentum, however, remains stubbornly strong and inconsistent with a return of inflation to target.
The lower headline annual rate conceals a solid 0.3% monthly rise in the core price measure tracked here – the CPI excluding unprocessed food and energy, adjusted for VAT effects and seasonal factors. The six-month rate of change of this measure (smoothed by taking a three-month moving average) remains near the top of its range in recent years, at 2.9% annualised – see chart.
A partial unwinding of the favourable April base effect in May could be offset by a recent reversal in motor fuel costs that promises to shave 0.2 percentage points from annual CPI inflation – the average price of unleaded has fallen back to about 138 pence per litre from 142.5 pence last month. The outcome may depend on rounding but this could allow the Governor to escape letter-writing duties – triggered by a headline print of 3.1% or higher.
The forecast here remains that CPI inflation will finish 2012 at about 2.75%, based on a small easing of core price momentum and broad stability of commodity prices and the exchange rate. Following the recent upward revision, the Bank’s central projection is similar (the May Inflation Report fan chart numbers will be published tomorrow).