CPI inflation was expected to fall in April because of lower petrol prices and a favourable Budget base effect but the outturn of 2.4% was below a projection here of 2.6% (also the consensus forecast). The chart shows a revised profile incorporating the modest good news in today’s release. Inflation is projected to rebound to a peak of 3.3% in June before falling back to average 2.8% during the second half of the year.
Suggestions that today’s news marks the start of a new favourable trend are unconvincing:
Price expectations balances in business and consumer surveys are in the middle of their ranges in recent years, during which inflation has consistently overshot the 2% target.
Import prices have yet to respond fully to sterling weakness since late 2012.
Wholesale petrol prices are rising again. The drag effect on annual inflation will reverse even assuming stable pump prices.
A continued revival in economic momentum during 2013 may encourage more firms to raise prices, given modest spare capacity and below-average margins.
Stronger monetary growth since late 2011 should begin to exert upward pressure from late 2013, based on Friedman’s average two-year lead from money to prices.
The recent inflation fall, nevertheless, has improved economic prospects for the remainder of the year by giving a further boost to real money supply expansion.
The new CPIH inflation measure incorporating owner-occupiers’ housing costs fell to 2.2% in April. Such costs, however, are supposedly rising at an annual rate of only 1.0%. This is difficult to reconcile with other information: the CPI index of actual rents increased by an annual 2.6% in April, while the deflator for imputed rents in the national accounts climbed 5.7% in the year to the fourth quarter of 2012.