UK inflation unexpectedly strong… making for a difficult BoE decision

Commenting on the Consumer Price Index (CPI) published today Royal London Asset Management’s (RLAM) senior economist, Melanie Baker, said:

“The movements in inflation in February will reflect some temporary factors and some more lasting trends. The fall in energy price inflation still has some distance to go, with powerful negative base effects likely to pull headline inflation down this year. Some of the movement higher in catering and food prices this month seems likely to prove temporary. Although it is difficult to attribute too much of the rise in February to even stronger underlying domestically driven inflation, domestically-driven inflation still looks strong.

“Meanwhile, inflation in essentials like energy and food remains very high and will still be painful for many households.

“The Bank of England, meanwhile, face a difficult decision. Today’s inflation figures were stronger than the last Bank staff forecast.   A near-term net stimulative Budget adds to reasons that could normally have been expected to justify a rate hike.  However, not only did the Bank in February signal that they did not necessarily see themselves hiking further, but recent market events make the near-term outlook for monetary policy less clear. Despite today’s data, it still wouldn’t be that surprising if the MPC chose to keep rates on hold at their meeting tomorrow. However, I continue to think that they would then hike in May, given the strength of domestically driven inflation and, for now, continue to pencil in another hike after that too.”