HiFX comments on the CPI data
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, comments on today’s CPI data.
“This morning’s news that UK consumer price inflation is at a record low is very good news since we have an economy that is on the right path with robust growth and falling unemployment. Sterling weakened by around 0.5 cent against both the dollar and the euro following the release, since the disinflationary environment would suggest a neutral or easing monetary policy stance. The Bank of England however recently suggested that the next move will be to hike rates, albeit not for a while yet.
“The components where prices are falling are predominantly food and energy, neither of which people can hold off buying for any real length of time, so the risk of deflation is negligible. What this does is provide a boost to households’ disposable income and unless the current economic environment turns sour, it should result in increased levels of consumer spending. The interesting dynamic will be what impact it has on wage settlements which are a big focus for the Bank of England who have forecast wage growth to rise to over 3% this year and next.
“Currently, average wage growth is just 1.7% and with inflation of just 0.3%, employers have good reason to temper expectations of bumper pay rises. What will ultimately determine whether the MPC are correct in their forecasts is of course whether demand for labour begins to outstrip supply, giving employees the stronger negotiating position.
“For sterling, the outlook remains fairly positive with the economy in growth mode but May’s general election is certainly a short-term concern with a hung parliament previously having seen it weaken sharply.”