Why the rise in UK inflation may be a blip in a downward trend

Is that it ? Did the long-awaited rise in living standards last just the six days between the news that earnings had edged up to 1.3% and the latest data from the Office for National Statistics showing that the annual inflation rate has risen to exactly the same level?

Almost certainly not. The October data for the cost of living was certainly a surprise, especially after the Bank of England governor, Mark Carney, said last week that he expected to have to write to George Osborne in the new year explaining why inflation had fallen below 1%.

But the increase in the annual inflation rate looks like a blip in a downward trend. And that means real incomes will soon be on the rise once more, and that Carney had better make sure his fountain pen is full of ink.

There are four main reasons why inflation is likely to fall in the coming months. The first is the collapse in the oil price, which is feeding through into lower prices on garage forecourts. A litre of unleaded petrol costs just over 120p a litre. Meanwhile, manufacturers are being helped by crashing commodity prices. Input prices for factories are down by more than 8% year-on-year.

The second factor is the intense supermarket price war, where the big retailers are slashing prices to try to retain or win market share. Bad news for profits, good news for consumers.

The third factor is the mild autumn. Clothes shops are desperate for a cold snap so they can start shifting their winter stock. Already some of them are offering pre-Christmas discounts; more will follow if it stays mild.

Finally, there’s the slowdown in the global economy. Japan is in recession and the eurozone is barely growing. The UK economy is not poised to tank but it is starting to slow. Bank of England action to prevent a house-price bubble is having an impact on mortgage demand.

So, the outlook for late 2014 and early 2015 is as follows: the annual inflation rate will fall in November and continue sliding. The gap between wage growth and inflation will widen, leading to modest increases in real incomes. Interest rates will remain at 0.5%.

Powered by Guardian.co.ukThis article was written by Larry Elliott, for The Guardian on Tuesday 18th November 2014 11.09 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010


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