U.K. Inflation Rate Drops Below 1% Amid Negative Rate Debate

U.K. inflation slowed to the weakest level since 2016 in April as energy prices fell and the coronavirus lockdown put the brakes on economic activity.

While the lockdown means it‘s hard to interpret the data, the report gives more of a flavor of the impact the coronavirus is having on the economy. Jobless claims surged last month, while Chancellor of the Exchequer Rishi Sunak said Tuesday that the nation was headed for a “severe recession, the likes of which we haven’t seen.”

Consumer prices increased 0.8% from a year earlier, the Office for National Statistics said Wednesday, less than the 0.9% economists expected. The core rate, which excludes volatile energy and food prices, slipped to 1.4%.

The pound was little changed after the report. Investors are betting that the BOE will eventually cut interest rates below zero after a string of policy makers, while indicating its not imminent, declined to rule out such a move.

The drop in April was the steepest since 2008 and takes the headline inflation rate to less than half of the BOEs target, meaning Bailey will have to write to the Chancellor explaining the reasons for the decline.

The central bank, which has already slashed interest rates to 0.1% and restarted bond buying to fight the crisis, said this month the economy may be heading for the worst downturn in three centuries as the pandemic keeps stores closed and consumers away from shops.

Downward pressure on prices came from fuel, energy and transportation costs, as well as clothing.

The ONS also reported widespread discounting of luggage and personal items such as jewelry, including earrings, gold rings, diamond rings and mens watches.

(Updates with market reaction in fourth paragraph)