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March 24, 2021 03:18 PM

U.K. inflation comes in below expectations in February

Sophie Baker
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    Bloomberg

    U.K. inflation in February came in below the consensus with a 0.4% year-over-year rise, surprising money managers and going against higher inflation expectations in the market.

    The Office for National Statistics said Wednesday that in February the consumer prices index rose by 0.4% for the 12 months to February, compared with a 0.7% rise for the year to January and 0.4% for the year to February 2020.

    Money managers said in emailed comments that the consensus was for a 0.8% rise.

    "Just when the dominant market narrative was for higher inflation expectations, the U.K. poured cold(er) water on that theory," said Charles Hepworth, investment director at GAM Investments.

    See more of P&I's coverage of the coronavirus

    The ONS said the largest negative contributors to CPI inflation were falling prices for clothing, secondhand cars and games, toys and hobbies.

    "It perhaps shouldn't be that surprising that clothing prices fell — who after all is really dressing to impress in a lockdown, and retailers that can maintain online presence will be heavily discounting prices to just attract some attention," Mr. Hepworth added. "Only when we return to a more normalized and open economy can sharply higher inflation surprises manifest and even then that's not a given. I don't think the inflation genie is out of the bottle just yet."

    Olivier Konzeoue, foreign-exchange sales trader at Saxo Markets, said in a separate comment that the pound sterling came under pressure with the inflation surprise on the downside.

    The data put the dollar "on the front foot against its main peers," while the pound sterling came under further pressure, now trading below $1.37. Mr. Konzeoue said that represents a 1.35% drop in a day.

    However, Melanie Baker, senior economist at Royal London Asset Management, said looking at broader data over recent months, CPI inflation remains in a range.

    "It is hard to get a clear read on underlying inflation when so much of the basket is imputed and when seasonal patterns are upset by lockdowns and social distancing restrictions. That picture should become clearer as we head through the second half of the year, following the government's current 'road map' out of lockdown," Ms. Baker said.

    She added that CPI inflation is not clearly trending anywhere, moving between 0.2% and 1% year-over-year since April last year.

    "We are not expecting a rapid rise in underlying domestic inflationary pressure as the U.K. economy has taken such a hit over this crisis," Ms. Baker added.

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