Pressure on Bank of England bosses mounts as inflation falls

The cost of living is likely to keep easing up as Britain’s economy falters, according to economists tracking the financial toll of the coronavirus pandemic.

Inflation could fall to 0.5 per cent over the summer, Howard Archer, chief economist at the EY Item Club, claims. This is well below the Government’s 2 per cent target.    

The Bank of England, which uses inflation as a key measure in determining interest rates, has already made two emergency rate cuts since March, with the current rate at the lowest in its 325-year history, at 0.1 per cent. 

Official new data published today revealed that dwindling fuel and clothes prices helped push inflation down last month.

Cheaper clothes, shoes and fuel 

The Consumer Prices Index fell from 1.7 per cent to 1.5 per cent last month, the Office for National Statistics said.

The fall was sharper than many economists predicted, and analysts at Pantheon Macroeconomics had predicted that the headline rate would slow to 1.6 per cent.

The cost of clothes and shoes fell by 1.2 per cent in March, as retailers saw footfall plummet when temporary store closures began. This was the first time the price of clothes and shoes have fallen over this period since 2015.  

Mike Hardie, head of inflation at the ONS, said: ‘Clothing prices normally rise between February and March as new year discounting ends.’

‘However, this year the price of clothes has eased due to some retailers offering discounts due to decreased footfall in stores before the lockdown started.’ 

Although prices for clothes and shoes were collected by the ONS on around 17 March, before the formal Government lockdown was introduced on 23 March, shoppers were already starting to practice social distancing and take ‘precautions’, the ONS said.    

The Covid-19 crisis is rapidly becoming a disaster for many retailers, and has already pushed struggling Oasis and Warehouse into the hands of administrators, while Debenhams has announced plans to permanently close seven of its stores, putting over 400 jobs at risk. 

The Retail Price Index, a separate measure of inflation, was 2.6 per cent last month, up from 2.5 per cent the previous month. 

As well as clothes and shoes, the cost of fuel played a big role in last month’s Consumer Prices Index figures.

A 0.6 per cent dip in transport costs came almost entirely from fuel as global oil prices plummeted amid dwindling demand, the ONS said. 

Petrol prices fell by 5.1p per litre between February and March, the latest report shows.  

Average petrol prices stood at 119.4p a litre last month, which is the lowest seen since February 2019, while diesel stood at 123.8p.

The ONS’ Mr Hardie said: ‘The cost of raw materials for manufacturers fell significantly over the year, driven by a global fall in the price for crude oil, which is at its lowest level since early 2016.’

The UK benchmark for oil has fallen to about $16, or £13, a barrel as economic activity grinds to a halt.

Alcohol and tobacco prices rose in March, partly because the duty on tobacco was raised in Chancellor Rishi Sunak’s budget last month. 

The pound rose 0.4 per cent against the dollar and 0.3 per cent against the euro after the ONS published its latest CPI figures, meaning sterling now stands at around $1.23 and €1.14. 

The FTSE 100 index was up 1.04 per cent or 58.89 points to 5,699 at the time of writing.

Inflation expected to fall further

A growing body of economists and City experts think inflation will continue to fall over the next few months, sinking well below the Government’s 2 per cent target.

When inflation moves lower, speculation often mounts that a cut in interest rates could be on the cards. But, the Bank of England has already made two swathing interest rate cuts since March. 

With interest rates at 0.1 per cent, hard-pressed savers face years of rock-bottom returns on their cash, while borrowers looking for a mortgage could find themselves a cheap deal once the market gets moving again. 

Howard Archer, chief economic adviser for EY Item Club, said: ‘Inflation looks certain to fall back sharply over the coming months and we believe it could get as low as 0.5 per cent over the summer.

‘Sharply lower oil prices will bring inflation down, along with substantially weakened economic activity in the near term at least.’

He added: ‘Inflation will also be limited by lower energy price inflation from April (when the April 2019 increase in Ofgem’s electricity and gas price caps will drop out of the year-on-year comparison). Additionally, Ofwat has proposed lower water and sewerage price caps from April.’ 

Melissa Davies, chief economist at Redburn, said: ‘It will be a volatile ride for inflation over the next year, with negative numbers a possibility followed by a sharp reversal.

‘The underlying trend is one of lower prices, however, as the economy is unlikely to catch up the ground lost during this initial shock.’

Ms Davies thinks Bank of England boss Andrew Bailey and his team of policymakers need to pump more stimulus into the economy.

She said: ‘More stimulus is needed, with only limited QE help from the Bank of England and the Treasury’s lending guarantee scheme falling short. Even the furlough scheme is only delaying an inevitable and large spike in unemployment.’

Laura Suter, an analyst at AJ Bell, thinks the recent plunge in oil prices will drag inflation down too. 

Ms Suter said: ‘Even before the recent capitulation, the price of oil was on the slide in March and this dragged inflation down slightly from February’s 1.7% to 1.5%. 

‘Oil prices have a massive impact on the UK’s inflation rate and with prices at the pump and home energy costs getting cheaper we’d expect this trend to continue for the next couple of months.’