UK inflation predicated to tumble by summer

Economists warn that the UK inflation rate will fall further by this summer because of the impact of the coronavirus pandemic.

David Sapsted

25 March 2020

Inflation in the UK edged down to 1.7 per cent last month after hitting a six-month high of 1.8 per cent in January, according to the latest data from the Office for National Statistics (ONS).The February fall moved the inflation figure further away from the Bank of England's target of 2 per cent, but economists warned that the rate was set to tumble further by the summer because of the impact of the coronavirus pandemic.

Inflation predicted to fall further

Howard Archer, chief economic adviser at EY Item Club, says, "Inflation looks certain to fall back sharply over the coming months. The recent plunge in oil prices to a 16-year low will bring inflation down, along with sharply weakened economic activity in the near term at least."The lockdown of the UK economy – reinforced by appreciable consumer concern over their jobs and pay, despite government support – will hugely weigh down on demand and likely exert downward pressure on prices despite the supply-side shock."

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Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says the consumer price index looked set "to fall comfortably below one per cent in the summer.” Last month's fall was largely due to lower fuel prices, as well as downward pressure from video games, alcohol and tobacco products, food, furniture, household equipment and maintenance. Meanwhile, upward pressure mainly came from restaurant and hotel prices.

CBI reports decline in retail sales numbers – despite grocery stockpiling

Michael Hewson, chief analyst at CMC Markets, says the decline in oil prices seen since February "isn’t likely to move the needle that much when it comes down to how the UK economy is right now. However, today’s Confederation of British Industry (CBI) retail sales numbers for March could well signal evidence of a sharp slowdown this month.”That report from the CBI – the monthly Distributive Trends Survey, conducted between February 26 and March 13 – showed exceptionally strong growth in grocery and drink sales as shoppers stockpiled because of the COVID-19 outbreak. "However, most other sectors reported sharp falls in sales volumes, including clothing, furniture and ‘other normal goods’ (such as flowers, jewellery, cards etc)," reported the CBI.

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"The results of the survey suggest that while households are stockpiling groceries in response to the spread of the coronavirus and the introduction of social distancing, they are putting off purchases of non-essential items. In line with this, non-store retailers reported a fall in sales volumes, while internet sales growth slowed to a below-average pace."Mr Hewson warns that grocery stockpiling would not save the retail sector from suffering a huge decline. He says the CBI figures needed "to be set in the context of some panic buying on the part of consumers as toilet roll, pasta and tinned food was stripped from supermarket shelves. Nonetheless, we are still expected to see sales (growth) slide from plus 1 to minus 15 per cent”.

House price growth slows across UK

Other ONS data published on Wednesday showed that UK house price growth slowed in January, to an annual rate of 1.3 per cent, from 1.7 per cent in December. Prices fell in the East and South East of England, but picked up elsewhere.