The ONS will release their latest reading of UK inflation at 9:30am this morning, and there is a strong chance that the reading will be negative. The previous inflation reading was zero, in short prices measured on a basket of goods, were unchanged from the previous month. The Bank of England’s mandate is to target a 2% inflation rate; during the financial crisis this was consistently overshot peaking above 5%. The Governor, Mervyn King would write a letter to the Chancellor explaining why the central bank had missed its target.
As prices drove higher led by energy and food prices, wage growth was non-existent, consumer expenditure was squeezed. With a larger proportion of income for the average consumer being spent on necessary items, there was limited upside for economic growth.
Move forward a few years, there is a new Bank of England governor (Mark Carney), however the MPC continues to sit on their hands.
Interest rates and zero inflation
A normal trade-off for low interest rates is inflation, as borrowing costs are reduced, assets prices should be pushed higher. The 6 year anniversary of record low rates (0.50%) has passed, with some analysts detailing the need for a raise in interest rates to contain asset prices; this is a contrast to the banks mandate. Employment is at a seven year high,
If the ONS reading is negative for CPI, it would be expected that Sterling would weaken in the FX markets as the “need” for a rate hike would be minimal. The BoE inflation report forecasts inflation to return to the 2% target in two years’ time. Oil prices have rebounded from the April lows, to be trading around $60/barrel, this should trickle through to input prices and be a driver of inflation from zero along with the tightening of the labour market.
ONS CPI (inflation) is released at 9:30am London
FTSE 100: 7,001
Inflation turns negative for first time since 1960
The ONS inflation reading for April 2015 fell 0.1% compared to zero in March.