Wed Apr 18 03:30:00 CDT 2018

Consensus Actual Previous
Month over Month 0.3% 0.1% 0.4%
Year over Year 2.7% 2.5% 2.7%

Consumer prices rose a surprisingly small 0.1 percent on the month in March to reduce the annual inflation rate by 0.2 percentage points to 2.5 percent. This was its second successive decline and, while still above the 2 percent target, the weakest outturn since March 2017.

The fall in the yearly headline rate was largely due to clothing and footwear which saw a 0.7 percent monthly increase in prices versus a 2.0 percent jump in March 2017. Alcohol and tobacco also subtracted as the increase in duty a year ago was not matched last month. In addition, there were smaller negative contributions from miscellaneous goods and services and furniture and household equipment. A partial offset was provided by a monthly rise in the price of recreational goods and cultural services but even this could prove short-lived as an early Easter probably provided for some upside bias.

Consequently, core prices were almost as soft as the headline, recording a 0.2 percent monthly gain which lowered their annual rate by a tick to 2.3 percent, a 12-month low. Meantime, the CPIH, the measure preferred by the ONS edged up 0.1 percent from February to reduce its yearly rate from 2.5 percent to 2.3 percent.

The March inflation report will inevitably dent speculation about another hike in Bank Rate next month. The first quarter outturn (2.7 percent) was comfortably short of the BoE's 2.9 percent projection contained in the February Quarterly Inflation Report which will make justifying any tightening all the more difficult. Certainly the doves are unlikely to be impressed. A split decision now looks more likely than ever and it may well be down to Governor Carney to cast the deciding vote.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.