Belfast Telegraph

Saturday 23 August 2014

Further fall in inflation predicted

Recent spikes in the cost of crude may lead to sharp inflation once again at the fuel pumps

Summer sales on the high street are expected to have helped drive another fall in inflation figures tomorrow, but rising oil prices are likely to ensure household budgets remain under pressure.

Experts are pencilling in a fall in the Consumer Prices Index (CPI) to 2.7% in August from 2.8% in July, which would be the second month in a row of easing inflation.

It is thought discounting among retailers and slightly lower food price rises may help bring CPI down while petrol costs rose less than they did a year earlier.

But recent spikes in the cost of crude may lead to sharp inflation once again at the fuel pumps. The crisis in Syria sent Brent to a six-month high of 117.3 US dollars a barrel at the end of August.

While it has since eased back a little as the threat of imminent US strike action has receded, the volatile situation in Syria could send oil jumping sharply higher once more.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Consumer price inflation could yet touch 3% in the near term due to the recent move back up in oil prices."

He predicts that CPI will begin to ease back thereafter, forecasting a drop to 2.8% by the end of the year, before falling to 2.2% at the end of 2014.

Inflation has remained stubbornly above the Bank's 2% target since December 2009 and families have have had to battle rising costs with muted wage growth.

Consumer spending power and s avings are being steadily eroded by above-target inflation, with wages increasing by just 1.1% in the three months to July compared with a year earlier.

While the Bank of England has been forced to tolerate high inflation for the sake of the recovery, if the CPI outlook fails to come down as expected, it could put a spanner in the works for Governor Mark Carney's new forward guidance pledge on interest rates.

Mr Carney has vowed to keep rates at rock-bottom levels until unemployment reduces to at least 7%, but high inflation is one of the caveats or "knock outs" that could see the Bank break its guidance policy.

The Bank could move to raise rates if inflation is expected to be 2.5% or more on a 18 month to two year horizon.

Mr Archer said this was unlikely to be a threat, even if the economy continues to recover at the same encouraging rate.

He added: "Crucially, underlying price pressures should be held down through the rest of this year and beyond by significant excess capacity, ongoing muted wage growth amid appreciable labour market slack, and limited scope for retailers to raise prices given still significant pressures on consumers' purchasing power."

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