Inflation set to stay at 1.2%

Published: Tuesday 18th November 2014 by The News Editor

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Inflation is expected to have remained at a five-year low when official figures are published today, as the prospect that it will head even lower pushes forecasts of an interest rate hike as far back as 2016.

The measure of Consumer Price Index (CPI) inflation for October is predicted to have stayed unchanged from the previous month at 1.2%.

It comes days after the Bank of England said CPI would probably fall below 1% over the next six months – which some expect could happen in December.

This would prompt governor Mark Carney to have to write a letter of explanation to the Chancellor.

The low inflation environment coupled with warnings of gloom about the world economy has led economists to push back expectations for when the Bank will raise interest rates from 0.5%, where they have been held since 2009.

Earlier this year experts had been expecting a rise as soon as this month but the likely timetable has now moved to the second half of 2015.

Simon Wells, chief UK economist at HSBC, went further and predicted that the first hike would not take place until the first quarter of 2016, amid a cut in expected growth and uncertainty around the general election.

He said the Bank’s rate-setting Monetary Policy Committee (MPC) looked more worried about unintentionally slowing the economy than it was about inflation.

The cooling in the housing market was also a key factor in enabling policy to remain loose, he said, adding: “In an environment of fragile growth and low inflation, tightening is just too frightening.”

Inflation has been kept low by the supermarket price war as well as falling oil prices and the strength of the pound weighing on import costs. It was last lower, at 1.1%, in September 2009.

The latest figures will show CPI has been at or below the Bank of England’s 2% target for 11 months in a row. A reading of more than 1% higher or lower than this target would prompt an open letter from Threadneedle Street to George Osborne.

Continued low inflation boosts prospects for an upturn in real pay after a six-year squeeze during which wages have been lagging behind the rise in the cost of living.

Latest figures last week showed pay rising at a still below-inflation 1% though stripping out bonuses the increase was 1.3%. The Bank of England is expecting this to rise to 3.25% for 2015.

However, while low inflation provides relief for hard-pressed households, policy makers would be concerned were it to fall too low as has happened in Europe – which is faced with the threat of a damaging spiral of falling prices.

Scotiabank’s Alan Clarke predicted UK inflation to remain at 1.2% for October.

Mr Clarke said an expected drop to below 1% in December and improving pay figures could see real terms wages growing by 1% or more by the end of this year.

Investec’s Philip Shaw said inflation was likely to have been pushed up in October by a lower fall in petrol prices than last year but reduced by the flattening out in the impact of the university tuition fee hike compared with 2013, and falling food prices.

Other forecasters expect CPI to have dipped to 1.1% for October.

Samuel Tombs of Capital Economics said: “Given that external demand remains weak, lower inflation is giving a very timely boost to real incomes and the overall economic recovery.”

Published: Tuesday 18th November 2014 by The News Editor

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