Belfast Telegraph

Friday 29 August 2014

Inflation dips but pay rises not helping the Northern Irish consumer

Rate falls below 2% as increases in wages remain at around 0.5%

Cutting the costs: DVDs are one of the products that brought inflation down in January

Falling inflation will not solve the crisis in living standards in Northern Ireland, according to an economist, after inflation fell below the Bank of England target for the first time in more than four years.

The Consumer Prices Index (CPI) dropped for the seventh month in a row in January, to 1.9% from 2% in December, according to the Office for National Statistics (ONS).

That brought inflation to below the Bank of England's (BoE) target of 2% for the first time since November 2009 with the fall due to the decreasing prices of goods such as furniture, DVDs and household goods.

It is hoped that inflation will continue to fall during 2014, leaving it on course to be overtaken by wage growth, which has been lagging behind rises in the cost of living.

It comes after inflation fell to the threshold in December, ending a lengthy period of high inflation placing households under pressure.

Below-target inflation will give the BoE breathing space to keep interest rates at record lows of 0.5%.

An inflation report published by the Bank last week forecast that inflation would average 1.8% over the first three months of the year.

Paul MacFlynn, economist and researcher at the Neri Institute in Belfast, said the fall in inflation to below 2% was not a cause for "triumphalism".

"While inflation is now below the target of 2%, wages are not rising at anywhere near this rate and so the benefit to the consumer is likely to be limited," he said.

"Average weekly earnings across the UK rose by only 0.7% in the year ending November 2013. For Northern Ireland our pay data is more limited but the data for 2013 shows that wages for the average full-time employee increased by only 0.5%.

"We cannot expect falling inflation to solve the crisis in living standards – only reasonable increases in wages can achieve this."

According to the Department of Enterprise, Trade and Investment's economic commentary, the full-time pay gap with the UK widened to £57.50 last year. Full-time employees' gross wages grew by only 0.5%, leaving the province's workers with the lowest median gross weekly earnings (£460) of all 12 UK regions.

Danske Bank chief economist Angela McGowan said falling inflation freed BoE Governor Mark Carney of any pressure to raise interest rates.

"Low inflation appears to be a global phenomenon at the moment in advanced economies, with both food and energy commodity prices having fallen back. The stronger pound is also making import prices cheaper for UK businesses and households," she said.

"Although the BoE would be reluctant to see the headline inflation rate fall too far below the target level, there are the obvious positive benefits of a low inflation scenario combined with GDP growth.

"As economic activity lifts this year we will hopefully see a rise in real wages, which lends further support to the demand side of the economy."

What is inflation? (Source: European Central Bank):

Broad increase in prices;

In a market economy, prices for goods and services can always change. Some prices rise; some prices fall. We refer to inflation if there is a broad increase in the prices of goods and services, not just of individual items. As a result, you can buy less for £1.

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