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Strong pound and low oil prices to keep inflation low: economist

By John Mulgrew and PA

Published 16/12/2015

Danske Bank's Angela McGowan
Danske Bank's Angela McGowan

Inflation is likely to remain low across the UK as a strong pound and cheap oil prices combine to keep it down, a Northern Ireland economist has said.

The rate edged out of negative territory last month, but official figures showed mild weather drove a record fall in clothing and footwear prices amid widespread discounting on the high street.

The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation rose to 0.1% in November, ending two consecutive months of mild deflation.

That came after falls in the prices of transport, alcoholic drinks and tobacco were smaller than the same time last year.

Inflation is expected to stay below 0.5% in the first half of 2016, before increasing towards the end of the year, according to Danske Bank chief economist Angela McGowan.

"However, it will not be until towards the end of 2017 that inflation reaches [the Government's] 2% target," she said.

"On the one hand, the UK's real economy is doing well, with growth above trend, increasing employment and the unemployment rate more or less back to normal.

"On the other hand, temporary factors such as the strong pound and a drop in oil prices are keeping inflation at this low level and will continue to put downward pressure on the headline rate going forward."

The rise in inflation took the CPI into positive territory for the first time since July, but it has now remained at or close to zero for 10 consecutive months in the longest run of flat or falling prices since records began.

Shoppers benefited from heavy discounting of clothes and footwear after a relatively warm autumn saw retailers slash price tags to shift stock of winter items, the data suggested.

Prices of clothing and footwear fell by 0.1% between October and November - the first time they have dropped month-on-month in November since ONS records began in 1996.

Philip Gooding, head of CPI at the ONS, said: "Although the prices of many items continue to fall, because they are falling at a slower rate than at the same time last year, the overall effect has been a slight rise in headline CPI."

But the ONS added that the drop followed a hefty increase in clothing prices between September and October.

Angela McGowan said while inflation was expected to remain low in May 2016, there was a chance that stronger pressure would force the Bank of England to adjust the headline rate.

"Monetary policy works with a lag, and unemployment is expected to fall below the non-accelerating rate of unemployment during spring 2016," she added.

"Once this happens, those low unemployment rates will start to put upward pressure on wages, and higher inflation levels will start to follow.

"Wage inflation as measured by the annual growth in average weekly earnings has lost momentum in recent months, but we think this is more due to the volatility in the series than a sign of weakness in the labour market."

Belfast Telegraph

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