UK inflation could fall back to 0%

Bank Of England Building

Sharp falls in petrol prices are expected to have pulled UK inflation back down to zero in August, economists predict ahead of the latest official figures today.

Financial markets will be looking to inflation data at 9.30am for clues as to when the Bank of England will start raising interest rates after more than six years at their record low of 0.5%. The US Federal Reserve is expected, by a slim majority of economists, to hike its main interest rate this week, but experts believe the UK’s central bank will wait until at least the end of the year to follow suit.

If forecasters are right about August inflation in the UK, that could ease the pressure on the Bank of England to start raising borrowing costs.

The headline inflation rate is forecast to edge down to zero for August from 0.1% in July, according to the consensus in a Reuters poll of economists. Some even see inflation on the consumer prices index (CPI) measure turning negative again after a sharp fall in crude oil prices and a supermarket price war cut the cost of petrol and diesel.

“Our forecast for August is that the headline measure of CPI inflation fell back to 0.0%, but there is a significant risk that it heads back into negative territory,” said Philip Shaw, economist at Investec.

Oil has more than halved from its $115-a-barrel peak last summer to under $50 now. Last week, investment bank Goldman Sachs said it could tumble even further to as low as $20.

Some of that has been passed on to motorists and unleaded petrol dropped 2.4p to 114.8p a litre in August, according to the AA. Diesel fell 7.4p to 111.9p a litre, making it cheaper than petrol for the first time since 2001, the drivers’ lobby group added.

Economists say that the relatively strong pound will also have helped keep the price of imported food low and that there may also have been some downward pressure on inflation from summer clothing discounts last month.

That could nudge down inflation to -0.1% or even -0.2%, they say, marking a return to the negative territory hit in April this year when prices fell for the first time in more than 50 years. That flirtation with negative inflation was only brief, and prices were rising again in May, albeit by just 0.1% on the year.

Hugging zero

July inflation
Inflation has been below the Bank’s 2% target for 19 months. This chart shows the UK’s CPI 12-month inflation rate. Photograph: ONS

Inflation, which is measured by tracking the price of a basket of goods and services, has been hovering around zero since the start of the year, well below the Bank’s 2% target.

But governor Mark Carney has warned households to start preparing for a rate rise from the current 0.5%. One of the nine-member committee that sets policy at the Bank, Ian McCafferty, voted for a rate hike last week. Policymakers have also sought to play down fears the UK is on the brink of all-out deflation, where falling prices persist.

With currency moves and volatile financial markets buffeting food and energy prices, the Bank will be looking to the so-called core rate of inflation in Tuesday’s figures for guidance. That measure, which strips out food, energy, alcohol and tobacco, picked up markedly in July’s figures. It rose to 1.2% from 0.8% in June, the highest for five months.

Policymakers will also be scrutinising the latest official pay growth figures due out on Wednesday. Economists polled by Reuters expect that pay growth picked up to 2.5% in the three months to July, or to 2.9% when stripping out bonuses. That compares with 2.4% and 2.8%, reported for the three months to June, respectively.

“How earnings develop over the coming months will play a crucial role in just when the Bank of England starts to raise interest rates,” said Howard Archer, economist at the consultancy IHS Global Insight.

Should earnings growth pick up markedly over the coming months, it would increase the likelihood that the Bank of England will raise interest rates early on in 2016.”

Powered by Guardian.co.ukThis article was written by Katie Allen, for theguardian.com on Tuesday 15th September 2015 06.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts