According to the ONS, the fall in consumer price inflation to 1.2% from 1.5% in August, came largely on the back of a drop in “transport costs (notably sea and air fares) and the prices of a range of recreational goods, such as laptop and tablet computers”.
But, it added, that if food and oil price inflation are excluded, the inflation rate would have been around a third higher at 1.6%.
“Historically, these prices have been among the main causes of inflation, though this has
gradually changed over the course of 2014. While the inflation figures cannot definitively identify
the causes of this change in trend, it seems plausible that increased supermarket competition, the
impact of a rise in the value of sterling on the prices of imported goods and falls in crude oil and
petroleum prices could be factors,” the ONS said.
Jason Hollands of Tilney Bestinvest, said from a broader perspective, inflation globally is being pushed down by oil and commodity prices, but he said: “It is also a by-product of the massive stimulus measures implemented by the world's two largest economies; the US and China.”
“In a "normal" downturn, weak companies would have been allowed to fail and excess capacity taken out of the system. However, unprecedented money printing has propped up these businesses through access to easy credit, resulting in low default rates. Rather than failing, the excess capacity that has been allowed to foment is simply exporting deflationary pressures around the globe,” he added.
Implications for rates
According to Hollands, the ONS data eases some of the short-term pressure to hike UK interest rates and will, in turn, lead to a weakening in sterling.
“A pushing out of expectations of interest rate rises delays the necessary, eventual process of bond markets adjusting to reflect expectations of higher interest rates. Likewise, this should therefore also be broadly supportive for continuing investor preference for higher yielding equities, with bond yields likely to remain low.”
Wouter Sturkenboom, investment strategist at Russell Investments agreed that the likelihood is for a delay in rates, but added that the divergent forces impacting headline and core inflation pose an interesting dilemma for Carney.
“Low inflation and falling inflation expectations allow him [Carney] to postpone tightening monetary policy while strong economic growth and diminishing slack pull the other way,” Sturkenboom explained.
“He basically has a six month window in which he can choose between those two forces and what to target. His caution so far seems to indicate he will err on the side of preventing inflation expectations to fall too far. If that’s correct a first rate hike will likely happen at the end of Q1. Waiting much longer than that will be difficult as economic slack dwindles and inflation pressures start to rise in areas such as wages.”
