Inflation set to stay below Bank of England's 2% target

Bank Of England Building

Inflation is expected to remain below the Bank of England's 2% target when official figures for August are published on Tuesday.

Most analysts expect the consumer prices index (CPI) measure of inflation to fall to 1.5% from 1.6% in July, as a result of pressure from the ongoing supermarket price war and lower petrol prices, although some are forecasting a drop to 1.4%.

The CPI rate fell back markedly to 1.6% in July after spiking to a five-month high of 1.9% in June, from 1.5% in May, which was the lowest rate since October 2009.

The retail prices index (RPI) measure of inflation, which includes housing costs, is forecast to remain unmoved from last month at 2.5%.

But it is the CPI measure, used for the Bank target, which will be watched by analysts amid speculation about when interest rates, held at a record low of 0.5% for more than five years, will start to rise.

Lower inflation eases pressure on the Bank for any hike as it considers whether the economy should return to more normal borrowing rates following the financial crisis. Experts are pencilling in an increase for February next year, but a sharper-than-expected change in inflation could shake up the market's expectations.

IHS Global Insight's chief UK economist, Howard Archer, said price pressure in the UK economy is muted, with Brent crude oil prices trading at two-year lows in September and the pound at a relatively strong level, despite recent volatility due to the Scottish independence referendum.

Archer added: "The inflation environment currently looks benign, particularly with supermarkets heavily engaged in a food price war."

Global Insight said it expected CPI to remain at around the current levels and clearly under 2% over the rest of 2014 and through the early months of 2015.

But Capital Economics, which predicts CPI to drop to around 1.4% today, said the inflation measure could hit 1% by the end of 2014. It said: "We continue to think that a combination of stable energy bills, lower import prices and weak growth in unit wages will enable CPI inflation to fall to as low as 1% by the end of this year and remain weak in 2015."

Powered by Guardian.co.ukThis article was written by Staff and agencies, for theguardian.com on Tuesday 16th September 2014 08.13 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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