The appreciation of the GBP since late 2017 (+5.7% vs. the USD and +1.4% vs. the EUR) has helped inflation to moderate to +2.5% y/y in March 2018, the lowest level since March 2017. Core inflation stood at +2.3% y/y. However, the recent rise in oil prices has driven up input price growth to +4.2% y/y in March from +3.8% in February, though it remained well below the 2017 average of +11%. Hence, pressures on firms’ margins have significantly moderated compared to last year. However, the acceleration in wages (+2.8% y/y in February compared to +2.1% on average in 2017) – while bringing real purchasing power slightly into positive territory – should put upside pressure on core inflation going forward. We expect a peak in wage growth at +3% y/y in the coming months. Lower shortages on the labor market should moderate wage pressures thereafter; unfilled job vacancies fell in January (-8,000) for the first time since June 2017. Hence, we expect inflation to reach +2.4% on average in 2018 (down from +2.6% in 2017) and +2.2% in 2019. The Bank of England is likely to increase its key policy interest rate by +25bp to +0.75% on 10 May.
