Market View: Inflation still on track to fall below 1%

October’s inflation rise is just a blip, with inflation still set to fall below 1 per cent in the coming months, economists have said, as new data reveals monthly CPI inflation has increased for the first time since June.

Data from the Office for National Statistics revealed that the 0.1 percentage point rise to 1.3 per cent in October reflected a slight easing of the rate of fuel price deflation. Economists say this will be short-lived: here we present the views of three on how low inflation is set to go.

Samuel Tombs, senior UK economist at Capital Economics

Article continues after advert

Mr Tombs said the drop is “very likely to be temporary”, citing that the sharp fall in oil prices looks set to mean that petrol prices will fall by about 6 per cent between October and December, “knocking about 0.2 percentage points off headline CPI inflation in the process”.

Meanwhile, this year’s utility price freeze is likely to mean that the contribution of electricity and gas bills to CPI inflation falls by about 0.3 percentage points, Mr Tombs said.

“Furthermore, it is unlikely that the current inflation rate fully reflects the impact of the recent fall in import prices or domestic producer prices – down 0.5 per cent in the year to October.

“As a result, CPI inflation is still on course for a sub-1 per cent rate soon that would require Mark Carney to reach for his letter-writing pen, and looks set to remain well below the 2 per cent target throughout 2015.

Mr Tombs added: “As such, low inflation will provide further support to households’ real incomes at a time when other sources of support for the economic recovery are fading and should enable the MPC to raise interest rates only gradually over the next couple of years.”

Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research

Mr Corfe said that the surprise uptick in inflation is likely to be very short-lived. “The main driver of the rise was the fact that the annual decline in petrol prices was lower than in September, as well as increases in the price of computer games.”

He believes that price growth should fall back again in next month’s inflation bulletin. “Concerns about the strength of the global economic recovery have placed downward pressure on commodity prices, which will reduce imported price inflation.

“The double whammy of low commodity prices and retail competition is expected to keep CPI inflation below the 2 per cent mark until 2016. Indeed, inflation is likely to veer below the 1 per cent mark in the early part of 2015.”

Mr Corfe added that on balance this is “good news” for the UK economy.

“It should provide a big boost to consumer spending power, helping to offset weaknesses in other areas such as exports. While consumer-driven economic expansion is not the sort of sustainable, balanced growth that policymakers should be pursuing in the longer term, it may be just what the UK needs to continue growing robustly in the face of global headwinds next year.