why inflation could be set to fall

Latest ONS data shows the Consumer Prices Index fell back slightly to 2.5% in August, but the fact remains that inflation has stuck above the Bank of England's 2% target for almost three years now.

why inflation could be set to fall


At least the CPI is well below its 5.2% peak less than a year ago, though the data is unlikely to raise much cheer from savers and investors while interest rates remain at nominal levels. So what the prospects for the remainder of this year and beyond?

For John Greenwood, chief economist at Invesco Perpetual, the factors which are beginning to pull inflation down – falling raw material costs and weak credit growth – do bring hope of real recovery in the UK.

Coalition hopes

“I believe the very low growth rates of money and credit will show up in weaker overall nominal GDP, and that in turn will be reflected in low inflation,” he adds.

“The Coalition government’s best hope for a recovery is that the inflation rate comes down, that wages continue to grow at a modest rate and that we start to get real earnings growth which would gradually generate some improvement in consumer spending.”

Elsewhere, Stephen Jones, Kames Capital’s joint head of fixed income and manager of its Inflation Linked Fund, expects inflation number to remain modestly volatile into the end of this year. He points out that domestic energy price rises implemented last year will fall out of the calculations shortly, just before this years’ round of electricity and gas price increases make it into the figures.

“Inflation may well then dip down over the very short term only to rise again toward the end of the year,” he says. 

Agricultural influence

“Recent oil price increases may also influence prices short term, as will the rise in agricultural prices with grains (corn, wheat and soya) all having risen considerably in price over the summer period on the back of poor harvest expectations and severe drought conditions in some of the main growing regions.” 

What about the prospects for the longer term? Jones shares Greenwood’s optimism that the overall outlook is to see inflation pressures ease as the tough economic and demand outlook continues to take its toll and keeps any ability to increase prices in check. 

“The habitual letter writing between the Bank of England and the Chancellor explaining UK inflation overshoots that we have become so accustomed to over the past few years, seems for now to be at an end,” he remarks.

We’ll wait and see on that one…


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