UK inflation unexpectedly fell further last month to the lowest level in more than a year as lower airfares provided some relief for cash-strapped Britons.
Triggering a sell-off in the pound to the lowest levels seen this year, the consumer price index dropped from 2.5% in March to 2.4%, according to the Office for National Statistics (ONS). Economists had expected the annual rate of growth in prices to remain unchanged.
This decline will be welcomed by consumers under sharp pressure from rising prices since the Brexit vote, when a sudden drop in the value of the pound pushed up the cost of imported goods.
While the impact from sterling’s fall has started to fade, economists reckoned higher fuel prices would force inflation to remain above the Bank of England’s target of 2%.
However, the latest drop raises fresh questions for Threadneedle Street after the Bank delayed raising interest rates earlier this month as a consequence of weak economic growth and inflation falling further than expected in March. The pound dropped by a cent against the dollar on foreign exchanges, reaching a five-month low of $1.3316.
James Smith, an economist at the Dutch bank ING, said: “In principle, this takes some of the heat off the Bank of England to hike rates again in the near term – although it’s worth remembering policymakers are still focused squarely on wage growth as a measure of underlying inflation.”
The ONS said airfares provided the biggest downward contribution for inflation, although it warned this was primarily down to Easter falling early in the month – a factor that could distort the inflation reading.
Airlines typically raise their prices around Easter, yet the ONS said it had found no impact this year because the holiday fell between its March and April price collection periods. For this reason, economists said Bank officials were unlikely to change their view on the need for a rate hike.
The timing of Easter in the middle of April last year contributed to air fares rising by 18.6% on the month, whereas this year, with Easter falling at the start of April prior to the ONS collecting its data, ticket costs for flights fell by 0.2%.
Elsewhere, the latest snapshot from the government’s statisticians showed soft drink prices had the biggest increase for this time of year, rising sharply in March and April following the introduction of the sugar tax. However, Mike Hardie of the ONS said many retailers had yet to pass on the impact of the levy to shoppers.
Annual price growth for goods leaving factory gates remained unchanged last month, although the ONS said the cost of raw materials required by manufacturers rose, mainly driven by a strong increase in the crude oil price of more than 8% in the past month to nearly $80 a barrel.
Economists said this could drive inflation higher in future months, as petrol stations push up their prices. There were already some early indicators as petrol prices rose by 1.2% last month.
Andrew Sentance, the senior economic adviser at the accountancy firm PwC, said: “The most likely scenario therefore appears to be that UK inflation will remain stuck around 2.5% over the summer and could pick up in the next couple of months.”
Philip Hammond, the chancellor, said the latest fall was “good news” for British households as wage growth continues to outstrip the rate of inflation. But Labour attacked the government for inflation running above the Bank’s target rate of 2%.
The most recent inflation figures come after Mark Carney, the Bank’s governor, said every British household was about £900 worse off since the Brexit vote. However, a survey of leave voters by the consultancy firm Simon-Kucher found less than a fifth would change their vote because of price increases.
