How is it possible that UK inflation – currently the highest in the G7 at 3.4% – can be below the 2% target as soon as April?
For one thing, it would be a significant undershoot of the Bank of England’s November forecasts, which had headline inflation averaging 2.9% through the second quarter.
Yet below target is exactly where we think we’re heading – even if only momentarily. We forecast inflation will drop to 1.8% in April before hovering at the 2% target through the spring and summer. What’s more, we think roughly 0.8 percentage points of the decline from December’s reading is virtually locked in – an artefact of regulated price changes and tax changes.
If we’re right, it’s another reason to think the Bank has more work to do on rate cuts. Remember, the Bank’s hawks have been particularly sensitive to elevated rates of headline inflation and the risk that this could morph into a more persistent episode of price pressure. We expect cuts in March and June.
The chart below shows how there’s a range of drivers – from water and energy bills to school fees – set to pull inflation down over the next few months.