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12 April 2017

Update

Inflation was stable in March but is expected to take flight

CPI inflation was unchanged and input price inflation remained in the double-digits in March

Image of Inflation was stable in March but is expected to take flight

CPI inflation was unchanged at 2.3% in March. Keeping inflation grounded was a sharp fall in air fares on a year ago; this was due to timing of Easter this year in relation, which meant that seasonal hikes in air fares and package holidays which occurred in March 2016 did not occur this year. As such, unwinding distortions in air fares mean that we can expect to see a jump in inflation over April. Looking further ahead, inflation will continue to pick up over the course of this year, as past falls in fuel prices unwind and the impact of the weaker pound continues to feed through.

Meanwhile, input price inflation remained in the double-digits in March (at 17.9%), chiming with anecdotes of growing cost pressures from CBI members, whereas factory gate price inflation also stayed historically elevated (at 3.6%). However, input price inflation ticked lower for the second month running. While it is still too early to say for certain, this could be a tentative sign that the “first round” impact of sterling’s depreciation on import costs may have peaked.

Industrial production contracted 0.7% month-on-month in February, building on January’s 0.3% drop. Weighing down the most on industrial production was the utilities sector (-3.5%) amid a sharp decline in the supply of gas (-6.4%), which may have been driven by a warmer-than-average February. Meanwhile, the manufacturing sector was down 0.1% on the month. Even so, this was narrowly-based, with a sharp drop in output in the volatile pharmaceutical sector (-4.4%) mainly to blame.

Construction output fell 1.7% on the month in February after stagnating in January. Weakness in infrastructure and private new housing work were the main drivers of the decline. But as with manufacturing, the underlying trend in construction output was stronger: on a three-month on three-month basis, construction output grew by 1.5%, although this marked the first easing in growth since the current uptick began in October 2016.

Markit’s composite PMI eased a touch over Q1 2017, to 54.6 from 55.6 in Q4. The softening was solely driven by the service sector, with manufacturing growth unchanged from the previous quarter. The construction industry – which is excluded from the weighted composite – also saw a deterioration over Q1. Taken together, the PMIs point to somewhat slower GDP growth of around 0.5% over Q1 2017, following an expansion of 0.7% over Q4 2016. However, 0.5% would still mark a fairly solid rate of growth for the UK and would be in line with its post-crisis average.

For more information contact alpesh.paleja@cbi.org.uk

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