U.K. February inflation came in far stronger than expected, with import prices helping to push food prices higher, causing Gilt futures to slump. Inflation yet again came in stronger than expected, with food, recreation and transport being quoted as the main upward drivers. Headline CPI rose 0.9% m/m and 3.2% y/y (medians 0.3% and 2.6% respectively), versus -0.7% m/m and 3.0% y/y in January. With CPI yet again above 3%, BoE Governor yet again had to write a letter of explanation to the Chancellor, Meanwhile, RPI, which was widely expected to turn negative in February, for the first time since 1960, was flat on the year (median -0.8%) while the m/m rate rose 1.0%. Excluding mortgages, the RPIX accelerated to 2.5% y/y from 2.4%. Overall, today's reading highlight those prices remain sticky, despite the sharp economic downturn, with the sterling depreciation ensuring some inflationary pressure. Fears of deflation hence appear somewhat exaggerated.
However, BoE's Governor King said CPI is likely to decline sharply over the coming months and that February's CPI reading reflects the pass-through of sterling weakness to consumer prices. King noted that CPI decline will reflect lower gas and energy prices as last year's sharp price increase will fall out of the base calculation but that CPI deceleration will also reflect weaker demand growth and increasing spare capacity in the economy. He commented that the MPC will now need to see if Sterling CPI risk is crystallizing or if other factors are behind the recent CPI acceleration.
Al Bawaba
