UK inflation falls to 1.5% but is this the bottom of the cycle?

17th June 2014

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The Consumer Prices Index (CPI) grew by 1.5% in the year to May 2014, down from 1.8% in April. The Office for National Statistics says that falls in transport services costs, notably air fares, made the largest contribution to the decrease in the rate. Other downward pressure came from the food & non-alcoholic drinks and clothing sectors. The largest upward pressure came from motor fuels and recreation & culture.

The ONS says that the timing of Easter in April is likely to have had an impact on movements in the index, most notably for air and sea fares.

The Retail Price Index (RPI), which is no longer in favour, fell to 2.4% in May from 2.5% in April. CPI has been below the Bank of England’s target for six months now.

Ben Brettell, Senior Economist, Hargreaves Lansdown says: “Today’s inflation figures surprised economists who had forecast a smaller drop to 1.7%. It now looks likely inflation will remain under the 2% target well into 2015. Below-target inflation has so far given the Bank of England scope to keep interest rates on hold, and this further fall to 1.5% would appear to continue that trend. Last week governor Mark Carney warned that rates could rise sooner than expected – this doesn’t look so likely now, though one would assume Mr Carney had seen the inflation figures before making his speech.

“A combination of strong growth and low inflation is undoubtedly good news. There is, however, a fly in the ointment. House price figures also released today show prices increasing by 9.9% on average in the year to April, and by over 18% in London. The Bank of England’s Financial Policy Committee meets today and house prices will surely be top of the agenda. It remains to be seen whether it can successfully introduce measures to cool the housing markets which allow the MPC to keep interest rates on hold.”

Neil Lovatt, director of ISAs and Savings at Scottish Friendly says: “Falling inflation means that people will have on average more disposable income, indeed research carried out by Scottish Friendly in June shows the level of UK disposable income has risen by three per cent in the last quarter. However people should be aware that this brief spell of financial freedom is likely to change when the Bank of England raise interest rates.

“The Bank of England has hinted at a potential rise in interest rates before Christmas. If this happens, and a fall in inflation is likely to fuel that speculation, then consumer disposable income will start to fall as people adjust to rising mortgage repayments.

“All of this points to one thing. Now is the time for people to stock pile savings for the future. Saving now, regardless of how small, will help to ensure that people are not forced to borrow to sustain their financial position when interest rates rise”.

Trevor Welsh, head of UK sovereign and inflation at Aviva Investors, says: “This has been primarily caused by the timing of Easter and the supermarket price war, which resulted in food and seasonal food prices falling sharply. However, this may be the bottom of the cycle and the market is already becoming more concerned about the tension in the Middle East and the possible impact on oil prices. As such, any downward move in inflation expectations has been muted so far.”

 

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