Inflation expected to hold steady as petrol prices and air fares fall


Inflation is expected to hold steady when official figures are released on Tuesday, with a drop in air fares and falling petrol prices helping keep prices down.

The Consumer Price Index (CPI) measure of inflation is expected to come in at 2.3% in March, according to consensus estimates, matching February's figure but up from 1.8% in January.

It marks temporary respite from climbing prices following the post-Brexit collapse of the pound, but economists say that a late Easter is responsible for the pause.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "Easter Sunday fell on March 27 last year, but on April 16 this year. This will affect the path of inflation because plane ticket prices soar close to the holiday."

He said air fares are likely to have plunged in March, contributing to a 0.13 percentage point decline from the headline CPI figure.

Meanwhile, a fall in petrol prices is believed to have shaved 0.06 percentage point off the inflation rate. 

"Nonetheless, CPI inflation will take big upward strides over the coming months, and it likely will exceed 3% by the summer," Mr Tombs said.

If true, that would exceed the Bank of England's predictions, which forecast inflation reaching 2.7% by the end of 2017, before peaking at 2.8% in the first half of 2018 and easing to 2.4% by 2019.

It is expected to pile pressure on the Bank's Monetary Policy Committee (MPC) to hike interest rates beyond 0.25% this year.

February's reading of 2.3% marked the first time inflation had surpassed the Bank's 2% target since November 2013.

It followed a significant weakening in the pound, which has fallen by more than 17% against the US dollar and 10% against the euro since the Brexit referendum, increasing the cost of imports.

One of the biggest contributors to the March CPI is believed to have come from rising food prices, according to Pantheon Macroeconomics, which also predicts that climbing energy prices are starting to squeeze households.

Howard Archer, chief European and UK economist at IHS Markit, said there is further pain ahead for consumers. 

"Consumer price inflation is expected to spike higher in April due to the later Easter impact.

"Additionally, more price rises by utility companies are occurring in April."

However, Mr Archer said the CPI's upward trajectory will eventually "be constrained" by a weakening UK economy over the coming months, and that businesses will not be able to raise prices without consequence.

"Retailers, manufacturers and services companies will find the upside to their pricing power limited, given that the previous prolonged squeeze on households' purchasing power has made consumers very price conscious," he said.