A weakening global investor sentiment and a collapse in oil prices has hurt the pound, but the British currency gained slightly on Wednesday despite news that UK inflation fell in March.
Brent crude oil lost a further 10% in value and WTI crude 5% on Wednesday. The slump in global oil prices demonstrates the massive drop in activity which hasn’t yet been priced by markets. Later on Wednesday, there was a jump in the price of oil, partly the result of a tweet in which President Donald Trump said that he had “instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.”
After the government’s Covid-19 lockdown measures which hit demand for some goods, inflation figures on Wednesday painted a negative image of things to come, as the Office for National Statistics (ONS) reported a 0.2% drop. While this was expected, as consumers spent less on clothing and fuel due to the lockdown, there are concerns that there will be further drops if restrictions continue. The pound could fall further if dire economic data continues, the oil market is further weakened, and investors’ mood drops.
According to the ONS, consumer prices rose by 1.5% per year last month, down from 1.7% in February, which was the lowest since December, as cheaper clothing and fuel pushed inflation down. The ONS explained: “Falls in the price of motor fuels and clothing resulted in the largest downward contributions to the change in the CPIH 12-month inflation rate between February and March 2020. Rises in air fares produced the largest, partially offsetting, upward contribution to change.”
The ONS believes that people avoided shops or stockpiled essential items due to the coronavirus. While the lockdown was officially introduced on 23 March and prices were collected around 17 March, social distancing seems to have shaped consumer behaviours and retailers’ expectations, with less browsing in shops and more time spent indoors.
The inflation report also showed that due to the virus pandemic and failure of the Organization of the Petroleum Exporting Countries (OPEC+) to agree to cut supply in early March 2020, petrol prices fell by 5.1 pence per litre between February and March 2020.
What did economists say?
The drop in inflation in March is just the beginning and demand will continue to wane. Equals Group chief economist Jeremy Thomson-Cook said: “UK inflation stayed steady at 1.5% in March but the wider picture around prices shows that we will not be talking about high inflation for some time. A recession like the UK is currently enduring – we will wait on the data to confirm – naturally will see lower inflation through the destruction of a demand side to the economy whilst movements in oil markets of late show just what can happen to prices when demand dries up. You cannot have inflation without demand and if we are correct that demand rebounds slower than it fell – a Nike tick-shaped rebound – then the impulse into inflation should be low although a weak pound does remain a risk.”
Laura Suter, personal finance analyst at investment platform AJ Bell, says that the drop in oil prices and the change in shoppers’ attitudes will affect inflation: “Even before the recent capitulation, the price of oil was on the slide in March and this dragged inflation down slightly from February’s 1.7% to 1.5%. Oil prices have a massive impact on the UK’s inflation rate and with prices at the pump and home energy costs getting cheaper we’d expect this trend to continue for the next couple of months….What’s more, with retailers having to shut their doors we’re seeing more and more offer discounts to shoppers to move their buying online.”
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