UK inflation has eased from the high levels seen in Q4, and we expect headline inflation to moderate further in the second half of the year, slowly moving back towards target although the actual glide path from here will depend on what the Bank of England does with the Bank Rate. As we discussed last month, today’s data will raise questions as to why policymakers are so eager to raise rates in the short term.
The hawks will probably point to higher average weekly earnings data which grew by 2.8% (using the 3-month average) year on year, and if compared to today’s UK CPI print, supports the case for anticipated positive real UK wage growth over the rest of 2018.
However, while wage pressures for UK households are finally beginning to ease, we would still question the path of consumption in the UK, given how hard households have been squeezed in recent years. We know that inflation should ease over the course of this year; if consumption also falls or stagnates, the justification for higher rates could begin to erode quite quickly.
There will be an awful lot of noise around today’s release. The most important thing to remember is that inflation-protected assets such as inflation-linked bonds not only provide defence against inflation but are also not correlated to risk assets.