HiFX comments on the CPI figures

Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, comments on the CPI figures.

“Sterling fell to session lows against the dollar and the euro following the CPI data, which showed prices fell last month, albeit by just 0.01% from a year previous. Price pressures have been easing steadily over the past couple of years due to a combination of lower fuel costs and the fierce battle for customers by high street retailers and supermarkets that has prompted deep discounts.

“CPI was running above the Bank of England’s 2% target in 2013, averaging around 2.8%, while last year it fell below the target, plummeting alongside the oil price in the last three months. A zero rate of inflation means that although wage growth has failed to pick up as quickly as would normally be expected with the economy growing and unemployment falling, it is positive in real terms. Average earnings are due to be released alongside employment figures on Friday and are expected to continue to show subdued annual growth with unemployment down to its lowest level prior to the financial crisis.

“We don’t envisage a situation where the UK faces a downwards spiral of prices that would require a response from the BoE, as has been happening in the euro zone. At the moment, the lower prices are on everyday essentials such as fuel and food that consumers can choose where they buy it from, but are unable to hold off waiting for prices to drop.

“Providing zero inflation doesn’t feed through into wage demands, then it leaves households with more monthly disposable income that recently they appear to be spending, supporting economic growth. It does however mean that we’re unlikely to see an interest rate hike anytime soon which is why sterling weakened slightly. It is currently towards its lowest level against the dollar in five years due in part to expectations that the U.S. Central Bank will hike rates in June or September which has strengthened the dollar. However, against the euro it is towards its highest level in over seven years due to the stronger U.K. economy and the ECB’s Q.E. programme that has caused the value of the euro to plummet.”