–National Statistics Set To Quantify Impact of VAT Cut Reversal
–Forecasts Show Q1 CPI To Come In O.1 Percentage Point sub-BOE Forecast

LONDON (MNI) – UK inflation in March is expected to come in over
3%, but still below the level predicted by the Bank of England in its
February Inflation Report.

Analysts’ median forecast in a Market News survey is for March CPI
to rise 0.3% on the month, leaving it up 3.2% on the year. If this
outturn materializes, Q1 CPI would average 3.23%, 0.1 percentage point
below the BOE’s forecast of 3.33%. Even a 3.3% outturn would leave CPI
below the central bank’s forecast.

CPI hit its local peak at 3.5% in January, before falling back to
3.0% in February, and most analysts expect it to nudge back up in March,
driven by higher energy prices.

Petrol prices surged in March, with the Market News Index showing
them up 3.7% on the month, but would add just under 0.1 percentage
points to CPI because of a strong petrol price rise in March 2009.

Shop price inflation has been subdued. The British Retail
Consortium’s data showed high street inflation eased in March, coming in
up 1.2% on the year, down from 1.7% in February and 2.3% in January.

The BRC found food price inflation easing, with prices in March up
1.2% on the year, the lowest level since the BRC series began in
December 2006.

While fresh food nudged higher in March, ambient food – food
treated for a longer shelf life – saw a sharp decline in inflation,
hitting its lowest level since September 2007.

National Statistics To Quantify Impact Of VAT Reversal

On Tuesday, National Statistics is set to make its first assessment
of the impact of the Value Added Tax reversal.

VAT returned to its former 17.5% level in January, having been cut
to 15%, and so far National Statistics has not published any
estimate of the impact. On Tuesday, it is set to publish some work on it
in its Economic and Labour Market Review, which will be issued at the
same time as the inflation data, at 0830 GMT.

Survey evidence suggests many that while many retailers have passed
on some part of the VAT reversal, it has not been passed on in full.

The BOE Agents Report in January found 46% of respondents planned
to pass on the VAT hike in full, with 17% not expecting to hike
prices at all and the remainder saying they would pass it on in part.

NS has previously estimated that the December 2008 VAT cut reduced
the 12-month CPI rate by around 0.5 percentage points. Many analysts
predicted retailers would pass on more of the reversal, but things
should become clearer Tuesday,

The range of analysts forecasts for the March CPI outturn is 3.1%
to 3.6%.

The 3.6% forecast comes from Citigroup, with economist Michael
Saunders saying CPI is likely to rise further in April. Saunders cites a
mix of base effects along with the rising petrol prices. CPI fell to
2.9% last March from 3.2% in February.

Even if Saunders is right, however, the Q1 average for CPI would
come in at 3.37% – still only a shade above the BOE forecast.

–London Bureau; Tel: +442078627491; email: drobinson@marketnews.com

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