U.K. consumer prices probably barely rose in February, leaving the inflation rate poised to drop below zero for the first time in more than five decades.
Price growth slowed to 0.1 in February from 0.3 per cent in January, according to the median forecast of economists before data on Tuesday. Bank of England Governor Mark Carney forecasts that the inflation rate will turn negative this year, which would be the first time in more than five decades.
For Carney and fellow BOE policy makers, the debate is whether this slump persists and feeds through to wages and inflation expectations, or proves temporary once the impact of a drop in oil prices fades. That’s a key area of uncertainty for officials as they divide over the timing of the first interest-rate increase since 2007.
Carney said last week that the pound’s strength is reinforcing disinflationary pressure on the economy, though he stuck to the view that inflation will pick up and officials should “look through” the current weakness.
BOE Chief Economist Andy Haldane went further this week, saying there may be more spare capacity in the economy than initially thought and inflation expectations are at risk of becoming dislodged. Policy makers must be ready to cut rates further if needed, he said.
“As headline inflation shows more signs of recovering over coming quarters, inflation expectations concerns should abate,” David Page, an economist at AXA Investment Managers in London, wrote in a note to clients. “U.K. households have twice seen inflation in excess of 5 per cent over the past seven years. I doubt they are going to quickly assume that inflation is a thing of the past,” Page wrote in a client note.
Page forecasts the BOE will increase its benchmark interest rate from a record low 0.5 per cent in February 2016, though a November move remains possible, he said. The median forecast of economists in a Bloomberg survey is for an increase in the first quarter of 2016.
Bloomberg News, edited by ESM
