Fears of domestic deflation have been growing since the UK inflation rate fell to its lowest ebb for 14 years in January, with the consumer price index growing by 0.5% in the 12 months to December 2014 and just 0.3% in the past month.
However, with Bank of England governor Mark Carney having said on 12 March that inflation rates will return to the targeted level of 2% within two years, Jeffrey is also confident that the outlook is not so bleak.
“The UK is not facing a deflationary environment,” he said. “The forward inflation in the UK is unequivocally a good thing. It has not come about because of what is going on in the domestic economy – it has come about because of the sharp fall in international energy and food prices.
“If you look at goods prices versus services prices, they are pretty much 50/50. When you look at services prices, yes, inflation rates have come down a bit, but are still rising at about 2.5% per annum.
That is much more indicative of domestically-generated inflation, and is important for policy-makers because it is above the targeted level of 2%.
“The low UK inflationary environment is a good thing, and acting as a tax cut for households. Average earnings in household incomes are beginning to rise more quickly than prices, which helps stimulate activity in the economy.”
Holes in the roof
Jeffery believes some of the underlying drivers of economic growth are strong enough to keep the momentum going, but added there are still some aspects that need to be corrected.
“Job generation has been far stronger than we thought, though there are still some ‘buts’,” he explained. “We have still got some way to go in terms of rebalancing.
“Throughout the recovery we have seen pretty static productivity, though that has not just been a feature of the UK.
“We also still have hefty trade deficit. To an extent that reflects problems in some of the UK’s main export markets, but it is also indicative of a high level of excess demand in the domestic economy.”
Public sector net borrowing in 2013-14 was at its lowest level since the 2008 recession, having jumped slightly in the previous period, while year-on-year government expenditure relative to GDP has been on a declining trend since 2010.
However, Jeffrey says the UK is not out of the woods just yet.
“In terms of government finance, the deficit has come down, but there is still work to be done to reduce it.
“Because the damage was done in the run-up to recession, we have not seen the same recovery in revenue as following previous recessions. That is something that will change going forward as the economy gains momentum, but it does indicate that the roof needs fixing.”
Having previously expected to see a UK interest rate rise in 2014, Jeffrey no longer sees it as imminent, but conceded that there is room for a manoeuvre.
“The key thing in terms of interest rates is what happens to wages,” he said. “If wage inflation rates start to pick up then we are going to see interest rates go up sooner than expected.
“Rates might go up this year, but if they do it will not come as a surprise. We will get lots of forewarning.”
