UK now in deflation but only temporarily
UK CPI inflation was in deflation in April as the annual growth rate in the consumer price index fell to -0.1%, down from 0.0% in March (Danske Bank: 0.1% y/y, consensus: 0.0% y/y). This is the first time since the official records began in 1996 and the first time since 1960, based on historical estimations. Core inflation dropped against expectations to 0.8% in April from 1.0% in March.
The largest downward contribution to the fall in CPI inflation from March to April came from air tickets, which fell 5.3% y/y. This component alone pulled the inflation rate down by 0.1pp. The ONS states that this may be due to the timing of Easter. The cheaper air tickets may also be due to lagged effects from the lower oil prices and increased competition. Cheaper air tickets also explain the fall in core inflation.
As expected, the largest upward contribution came from fuel prices, which increased in line with the oil price in April. Motor fuel prices increased 1.6% m/m in April and pushed the inflation rate up by 0.05pp. This was as expected. Although electricity and gas prices declined 0.1% m/m, the annual price change declined to -1.9% from -2.3%, implying that there also was a small upward contribution from gas and electricity prices. The total energy component pushed inflation up by 0.08pp. That said, the fall in energy prices is still a major reason why headline inflation is as low as it is.
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