UK Inflation for February 2015 was reportedly down from 0.3% to 0%, its lowest since the economic indicator first recorded on 1989. The situation diminished any hopes left for Bank of England rate hike that has been on the talk since 2014 but has not come true.

Yesterday (24/3), UK Inflation for February 2015 was reportedly down from 0.3% to 0%, its lowest since the economic indicator first recorded on 1989. Apart from that, several other crucial economic indicators also lose shine. The situation diminished any hopes left for Bank of England rate hike that has been on the talk since 2014 but has not come true.

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Cheap Oil And Supermarket Price War

UK Office of National Statistics (ONS), as quoted by The Guardian, reported that supermarket price war has made fuel prices down 16.6% in the last year and dropped food prices by as much as 3.4%. Consequently, although analysts expected UK inflation to drop from 0.3% to 0.1% in February, the actual figure was lower. 


InflasiUK Inflation January 1989-February 2015 
 

Ahead, prices are expected to go down again as cheap oil era goes on and causes lower energy and production costs. What's more, Poundsterling strength against the Euro that is UK main trade partner, may result in cheaper imported products.

The projection means that BoE inflation target at 2% is unlikely to be attained any time soon. The highest inflation in the country was reached in June 2014 at 1.9%, afterwhich data continue to move lower. Vicky Redwood from Capital Economics said to The Guardian that, UK inflation is dead. The UK is now within a whisker of deflation. It looks odds-on that inflation will turn negative in March, when the cut in gas prices by British Gas will show up in the inflation figures for the first time. Inflation is then likely to remain around zero/slightly negative for the rest of the year.
 

Other Indicators

Zero figure on the one economic indicator that is often seen holding pivotal role in central bank policy guidance underlines uncertainty in the UK economy. It can be further seen from other indicators that may influence interest rate decisions, such as wage growth and housing.

 

Pertumbuhan

UK Average Weekly Earnings Growth January 2001-January 2015
 

Earnings growth plus bonus have visibly slowed during 2008-2014. On 2014, the figres gradually went up only to step down again in January 2015 from 2.1% to 1.8%.

Meanwhile, housing prices in the UK that has been skyrocketing for some time and triggered worries about property buble now is quietly declining in speed. ONS figures showed that although house prices are still rising, but its growth seem to have significantly reduced, particularly after BoE applied macroprudential approaches to limit the amount of credit allowed to be channeled by UK banking last year.
 

BoE Rates May Go Up, May Go Down

Several claimed that UK newest economic reports is still indicating improvements. Redwood, for one, although pessimistic about inflation but actually thought that deflation will boost household income and support economic recovery this year. UK Prime Minister, David Cameron, in his tweet was also quite sanguine, Inflation is running at 0% - the lowest on record. It's good news for family budgets and a sign our long term plan is working. Meanwhile BoE governor Mark Carney alluded that although prices in the UK will continue to fall in the spring, but it is not to the direction of deflation like in the neighboring Eurozone.

As we all know, deflation haunts many countries, especially after Japan failed to get out of decades long stagnation marred by deflations. Deflation means that prices stagnated or are falling, thus there is few incentives from businesses to expand, increase wages, or hire more workers. It is very difficult for countries that has fallen into deflation to get out of it. Before that, it is also commonly understood that interest rate hike is not possible to be done when inflation is at zero or even negative. Contrarily, in the event of deflation, it is commonly advisable for central banks to let loose its purse string by cutting rates or launching stimulus.

In this context, UK economy looked like it is not going to be able to handle rate hikes. BoE chief economist, Andy Haldane, was quoted by several UK media to have said that in his opinion, BoE may have to cut rates lower from the current 0.5%. He indicated that BoE rates could be hiked, but it also could be trimmed.

BoE governor Mark Carney have said that to respond to the inflation drop by cutting rates would be extremely foolish, but Monetary Policy Commitee member may have other considerations. Two hawkish members from the nine-member Bank of England Monetary Policy Commitee (MPC), Martin Weale and Ian McCafferty, have voted for rate hike from 0.5% to 0.75% before, but the two did not do so since January 2015.

 

GBP/USD yesterday fell to its lowest in a month after February inflation data was released. The disappointing UK inflation was met with slightly higher US inflation in the same period, up from -0.1% to 0% overall with core inflation up from 1.6% to 1.7%. US Dollar movements seems like it still hang up on the dovish FOMC statement a while back, but several analysts consider the currency's bullishness to remain. Even so, it is clear that overall US economic indicators are not yet arrived at its prime. Both the UK and the US is still struggling with the current global slowdown. But it is clear that if US the Fed manages to hike rates this year, then Sterling will be at the losing side.


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