21st May 2013
Inflation has fallen more than expected which is, of course, good news for savings and investors. The consumer price index, the measure increasingly used by Government, fell from 2.8% to 2.4% rather than 2.6%. The full report is on the website of the Office for National Statistics. The fall comes despite the Ernst & Young Item club suggesting that the Governor of the Bank of England Mervyn King was being overoptimistic about inflation and certainly about it falling to 2 per cent next year, the very often missed target. The Item Club said it expected inflation to settle at 2.6% for the next couple of years. Today, arguably gives a little bit of a boost to the Governor. But this is only one set of figures. We wouldn’t base your financial planning for the next couple of years on lower price rises.
We bring you a run down of the expert comments below on the economy, the implications for the currency and the cost of living.
Schroders’ European Economist, Azad Zangana, comments on today’s consumer price index (CPI) data:
“The fall is attributed to lower fuel prices, as falls in global oil prices have fed through to lower prices on forecourts. In addition, smaller increases in duties from the Chancellor’s budget compared to a year ago also contributed to the fall in prices. Core inflation (excluding food and energy) also fell from 2.4% to 2% – falling to its lowest rate since November 2009. The fall in March’s annual inflation rate will come as a relief to households, who on average are only seeing 0.4% increases in pay compared to a year ago. Unfortunately, the fall in inflation should be temporary. Looking ahead, next month’s inflation release will also include further falls in energy prices, however, these are unlikely to continue, which is likely to push inflation higher again in following months.”
Kames Capital’s chief investment officer and manager of the Kames Inflation Linked Fund Stephen Jones
“There has been evidence of a more deflationary tone in global economic data over recent months. Measures of European inflation have surprised to the downside, perhaps to be expected given the weak demand environment and poor economic health of the Eurozone. Even in the US, where headwinds from fiscal policy have had a slowing effect on activity, but where growth and demand has still been sustained at low but positive levels, inflation has been subdued.
“Food and other commodity price falls have helped emerging market and Asian inflation come off last year’s higher levels. Today’s UK inflation numbers confirm the power of these trends, and with lower than expected outcomes across consumer and retail price measures they reinforce the impression that inflation globally can surprise to the downside. When UK inflation data is coming in below expectations, after so many surprises to the upside in the past, then we know the trend to lower inflation seen elsewhere has some power.
“Headline expectations for the data released today were for UK consumer price inflation (CPI) to print at 2.6% per annum and the retail price measure (RPI) to come in at 3.1%. Both outcomes were 0.2% below these expectations, at 2.4% and 2.9% respectively. In addition, a measure of core consumer price changes, excluding energy, food alcohol and tobacco, fell to its lowest level since November 2009 with a 2% per annum year on year change.
“Despite these good numbers today, inflation remains above the level targeted by even the watered down Bank of England inflation remit. The Bank itself forecast some of the improvement seen today, but still, by its own admission, sees inflation ahead of a desired 2% rate for some time to come. Price falls were seen across the basket of goods measured, with particular weakness in airfares – always a volatile component of the calculation.
“This is the first time in a long while where inflation data in the UK has surprised so dramatically to the downside. We have been all too used to upside surprises and target misses. The policy implications from this one month’s reading are too remote to rely on, but a continued trend to lower inflation in the face of subdued growth will only support the notion that interest rates will stay lower for yet longer, and that the new Governor of the Bank of England, Mark Carney, has real scope to be inventive with monetary policy action should he feel so inclined.”
Andy Scott, account manager at HIFX
“Sterling fell by around 0.5% against the euro and the U.S. dollar Tuesday morning following the release of consumer price inflation for April, which showed inflation fell by more than expected last month. CPI was up just 0.2% last month and is now running at an annualised rate of 2.4%, a seven month low. That compares with 2.8% the previous month and is the first drop in the rate of inflation for the last six months.
“Sterling weakened as speculation increased about the likelihood of more monetary easing by the Bank of England which would have a negative impact on the currency’s value. Earlier this year the Bank had been concerned by higher inflation and the risks of stoking it further by more quantitative easing due to the probability that Sterling would fall. Their most recent assessment of the inflation outlook is for it to ease further over the next two years and today’s figures seem to back that view up.
“Whilst the economy seems to be showing some more positive signs of recovery, it’s still very sluggish and there’s still the risk of seeing further contractions unless the pace of recovery picks up, especially with the eurozone still in recession. The new governor will no doubt be keen to make his mark at the Bank when he starts in July and he may well opt for additional quantitative easing to further aid the recovery. This possibility continues to hamper sterling’s own recovery from its dreadful start this year where it was one of the worst performing currencies. We await Mr Carney’s new appointment with great anticipation.”
Pensions and living costs
Aston Goodey, sales and marketing Director, MGM Advantage
“Average household needs to find an extra £603.53 a year to maintain standard of living. The latest data shows UK inflation (consumer price index or CPI for short) grew by 2.4% in April, down from 2.8% in March. This leaves UK households collectively needing to find an extra £15.75bn a year to maintain their standard of living enjoyed 12 months ago, Each household will typically need to spend an extra £603 a year to maintain their standard of living from just one year ago. Although the headline news is good news households across the UK continue to feel the financial pain of inflation. This pain will be particularly felt by households on low or fixed incomes, including people who rely on pensions to fund the cost of living. But even people who have received wage increases will be feeling the pinch as pay rises are not increasing as fast as the rising costs of living. Goods and services costing £100 in 2003 would now cost one third more, or £133.89, with inflation averaging 3.2% a year, which shows just how damaging inflation can be over time.
“Worryingly upward inflation is being driven by price movements for food and non-alcoholic drinks. For many retirees on a fixed income this is a real issue. Over 90% of people have annuity incomes which are fixed when they retire, which means their real spending power over time is reduced. Conventional annuities with built-in escalation tend to be unpopular due to the low starting incomes. This has created strong demand for other ideas that can provide some protection against inflation.”