UK inflation dropped to 2.5 per cent from 2.7 per cent in March, data released by the Office for National Statistics (ONS) revealed this morning (18 April).
The data comes in light of UK wages rising by 2.8 per cent for the three months to the end of February, meaning wages are now rising at a faster pace than the increase in the cost of a typical basket of goods and services.
Mike Bell, global market strategist at JP Morgan said he thinks UK inflation is likely to fall sharply this year, boosting wage growth and consumer confidence.
He said this should lead to a rise in consumer spending, which boosts economic growth.
Mr Bell said there is traditionally a strong correlation between real wage growth and higher consumer spending.
He expects UK inflation to fall to the Bank of England’s target rate of 2 per cent, or lower, during 2018.
Mr Bell said this could mean wages growing at 1 per cent faster than inflation.
As a result, JP Morgan have the same weighting to UK equities as the benchmark at a time when the asset class is deeply out of favour with many market participants as a result of political uncertainty around Brexit.
Philip Smeaton, chief investment officer at wealth manager Sanlam said the brightening outlook for the UK economy should not tempt the Bank of England to increase interest rates.
He said the level of debt in the economy remains high, as consumer spending was stable even when inflation was high, and this must be the consequence of more borrowing.
Ben Brettell, senior economist at Hargreaves Lansdown, pointed out the drop in inflation has caused the value of sterling to fall slightly, as the market takes the view a rise in interest rates in May is now less certain.
Though Mr Brettell said it remains more likely than not that interest rates will go up next month.
A pound at 10.30am was worth $1.42, down from $1.43 before the inflation announcement.
David.Thorpe@ft.com
