Later this week we will receive UK inflation data for the month of April. At the time of writing, the Reuters Poll’s median forecast for headline CPI inflation stands at 2.1%, compared with a reading of 3.2% in March. Nevertheless, a number of forecasters expect it to fall all the way to the 2% target, while Fathom’s forecast sees it even drop a little below, to 1.9%. That would be a big fall from the previous month’s figure, but it reflects almost entirely a decline in the contribution from energy prices. The difficulty faced by UK policymakers stems from core inflation, and from services inflation in particular, which remain stubbornly high. Gertjan Vlieghe, a former MPC member, recently argued that high core inflation in a number of OECD economies has largely been a reflection of higher energy costs; and that, as a lagging indicator, core inflation should be given relatively little weight by policymakers. We are not convinced. It seems to us that the countries that saw the largest increases in energy costs, and therefore in overall inflation, have probably also experienced an increase in the persistence of core inflation. This week’s chart shows that regular pay growth in the UK private sector stood at 5.9% in the twelve months to March. On the face of it, that is well above the kind of rate that would be consistent with a sustainable return of headline inflation to the 2% target any time soon.
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