Inflation should rise in November and into 2016

Hot Air Balloon

Inflation has reached a trough, at least for now.

The government’s preferred measure of the cost of living remained unchanged at -0.1% in the year to October, but will turn positive when the data for November is released next month.

The reason is that the consumer prices index (CPI) fell by 0.3% in November 2014 as a result of the plunging cost of crude oil. Unless that decline is repeated this November – which it won’t be – the annual inflation rate will mechanically rise.

Inflation figures will increase again in the new year, when last January’s 0.9% drop in the CPI will cease to bear down on the annual inflation rate. Again, this increase in the annual rate will reveal more about what was happening this time last year than it does about current price pressures.

Inflation hawks will point to the small increase in so-called core inflation as evidence that these pressures are building. The Office for National Statistics calculates inflation excluding items – such as energy and food – where prices can fluctuate because of what is happening on global markets.

Unlike headline inflation, the core measure of the cost of living did not turn negative and reached a trough of 0.8% in April and June this year. Since then, it has risen gently, and a recovery in clothing and footwear prices pushed it up by 0.1 points to 1.1% last month.

It will be the core rather than the headline measure of inflation that the Bank of England will be focusing on in the months to come, and the small rise in October has convinced some City analysts that a rate increase in the first half of 2016 is possible.

There are, though, reasons why the Bank’s monetary policy committee is likely to remain wary of acting too quickly. Firstly, inflation has been lower for longer than Threadneedle Street imagined at the start of the year.

Second, wage pressures remain weak, in large part because employers have adjusted down pay offers to reflect the lower level of inflation.

Third, the strength of the pound has been making imports cheaper and the effect of sterling is likely to persist well into next year.

Finally, a fresh fall in oil and other commodity prices is cutting costs for manufacturers. Producer prices – the cost of goods leaving factory gates – are barely rising.

What does that all mean? It means that, while the UK’s flirtation with deflation is over, the MPC will want stronger evidence of a real underlying increase in inflation before it pulls the interest rate trigger.

Powered by Guardian.co.ukThis article was written by Larry Elliott Economics editor, for theguardian.com on Tuesday 17th November 2015 12.22 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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