Britain’s inflation rate slowed last month, but is likely to bring only limited relief to households as it stubbornly held in the double digits because of rapidly rising food prices.
Consumer prices rose 10.1 percent in March from a year earlier, the Office for National Statistics said on Wednesday, a slightly slower pace than the 10.4 percent in February. But economists had expected the country’s inflation rate to drop below 10 percent for the first time since the summer.
Britain’s annual inflation rate peaked at 11.1 percent in October but its downward trend was disrupted in February, when the rate unexpectedly ticked higher. The Bank of England then raised interest rates for an 11th consecutive time in March, to 4.25 percent, the highest since 2008.
Wednesday’s data is a welcome return to inflation’s downward path, but Britain’s cost-of-living challenges are still stark. Food prices rose about 19 percent in March from a year earlier, with bread, meat and cooking oils continuing to climb quickly. Bread and cereal price inflation is at a record high, according to the statistics agency. Core inflation, a measure that excludes food and energy prices, which tend to be more volatile, was 6.2 percent, the same as the previous month.
And the headline rate of inflation is still high compared with international peers, as food prices rise more quickly, companies’ wage costs grow and high household energy bills continue to elevate Britain’s price index. In the United States, the Consumer Price Index moderated in March, rising 5 percent from a year earlier, while the eurozone’s inflation rate eased to 6.9 percent.
Although inflation is expected to slow sharply later this year as lower energy prices reduce business costs and eventually flow through to lower household bills, uncertainty remains about how quickly the pace of price increases will return to the central bank’s 2 percent target. Policymakers at the Bank of England have been closely monitoring private-sector wage growth and prices in the service sector for signs of how deeply inflationary pressures are becoming embedded in the economy.
On Tuesday, data from the statistics agency showed that wages excluding bonuses rose 6.6 percent in the three months to February, compared with the same period a year earlier, beating economists’ expectations. But there were also tentative signs that Britain’s labor market was beginning to loosen, supporting bets that the Bank of England is close to halting rate increases. In February, for a second consecutive month, the pace of wage growth in the private sector slowed slightly, while the number of job vacancies fell and more people returned to the work force, Tuesday’s data showed.
Services inflation, which is heavily influenced by companies’ wage costs, held steady at 6.6 percent, data published on Wednesday showed.This is the last set of inflation data that will be released before the Bank of England’s policymakers meet in early May to decide whether to raise interest rates again. In February, the central bank had predicted the inflation rate would drop to 9.2 percent in March.
“Headline inflation in the U.K. is once again heading in the right direction, yet the Bank of England is still a long way away from being able to feel comfortable that price pressures are under control,” Hugh Gimber, a strategist at JPMorgan Asset Management, said in a e-mailed comment on Wednesday, adding that another quarter-point increase in interest rates appeared “highly likely” in May.
“The biggest mistake would be to claim victory prematurely” in the fight against inflation, he warned.
A rate increase in May could be the final one, said Samuel Tombs, an economist at Pantheon Macroeconomics. In April, the inflation rate will fall to 8 percent, he forecast on Wednesday, as the contribution to inflation from household energy bills weakens. A year earlier, household energy bills soared more than 50 percent, but the impact of that will begin to wash out of the annual inflation index while an extension of the government’s guarantee on energy prices steadies household bills.
The Bank of England expects Britain’s inflation rate to “fall sharply” over the rest of the year and the governor of the central bank, Andrew Bailey, has said companies should keep this in mind when setting prices to ensure inflation actually returns to the bank’s target. There have been growing concerns, especially among some policymakers at the European Central Bank, that efforts by companies to maintain their profit margins could keep inflation higher than expected as energy and other wholesale input prices decline.
On Wednesday, Britain’s statistics agency also said that the overall costs facing business have been “largely stable” since last summer, but prices remain high.
