Judging from media reports, today's data releases represent a triple jackpot for interest rate doves – inflation down, house prices weakening and retail sales slumping. Closer examination, however, suggests otherwise.
The most significant news, arguably, was a further narrowing of the trade deficit in February, reflecting stronger export volumes and a fall in imports – see first chart. Based on the January / February results, trade is on course to boost first-quarter GDP growth by 1.25-1.5 percentage points – further evidence that the economy has bounced back solidly in early 2011 despite high-street weakness (although the Visa Europe expenditure index released last week suggests that consumer spending rose last quarter).
The fall in CPI inflation from 4.4% in February to 4.0% in March was mainly due to a slowdown in food prices and air fares. This effect is likely to prove temporary: it may partly reflect Easter falling later this year than last while food commodity prices and fuel costs have climbed further in recent weeks – second chart.
In addition to the March inflation figures, the Office for National Statistics released an analysis of the impact of the rise in the standard VAT rate from 17.5% to 20%. The increase is estimated to have boosted annual CPI inflation by 0.76 percentage points in January, implying that the headline rate would have been 3.2% rather than 4.0% in its absence. This blows apart the claim that inflation would be close to the target but for the VAT hike, based on the misleading "CPI at constant tax rates" measure, which assumes that tax changes are passed on in full (CPI-CT rose an annual 2.3% in January and 2.4% in March).
The value of retail sales dropped by 1.9% in March from a year before, according to the British Retail Consortium, but weakness largely reflected the Easter effect, a point naturally downplayed by the organisation's propagandists. This is demonstrated by comparing sales with 2009, when Easter Sunday fell on 11 April (4 April in 2010): the average of the current and year-before annual changes was 2.35% in March, within the recent range and well above lows in late 2008 / early 2009 – third chart.
The 1.5% February decline in the Department of Communities and Local Government house price index, meanwhile, was entirely seasonal – the loss represents the smallest February fall since 2007. The more timely Halifax and Nationwide measures suggest that house prices are moving sideways – seasonally-adjusted indices rose by 0.1% and 1.0% respectively between December and March.
