Inflation falls to 2.4 per cent: expert views on the surprise fall

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.”

27 thoughts on “Inflation falls to 2.4 per cent: expert views on the surprise fall”

  1. Pavlaki says:

    Shaun, great stuff and very interesting – and worrying! I see only a microcosm of business now that I am virtually retired but a few things make me realise that although the economy has picked up maybe the tax take hasn’t yet or not too a level one might expect. Businesses postponed investment during the lean years and are now making up for that keeping their bottom line flat? With interest rates low, savings have been hit reducing the tax take there. Salaries are flat so no tax increase there. Vat is definitely up suggesting turnover is doing well but tax on profits? I don’t know, I don’t have the overall figures but the few businesses I keep in touch with have ploughed earnings into investment (sometimes greater advertising efforts etc) and kept the bottom line static or modest growth. It would be interesting to know how different sectors of tax have performed year on year.

    1. Anonymous says:

      Hi Pavlaki

      There was also a hint of increasing investment in the UK productivity analysis of the Bank of England that I analysed on Monday. So let us hope that this bears fruit in the months and years ahead.

      There has been a definite switch from direct taxes like Income Tax (by raising the Personal Allowance threshold for example) to indirect taxes like VAT (now 20%). The changes were illustrated here.

  2. Anonymous says:

    Economic growth or smoke and mirrors ?

    Is that increases in sickness benefit and increases in topping up zero hour contracts ?

    Or is it just the government’s inability to tax the estimated GDP increases attributed to the black economy ?

    1. Noo 2 Economics says:

      Neatly summed up Expat

  3. Forbin says:

    Hello Shaun,

    I guess your title refers to the apparent GDP revisions that has left us looking good as far as growth is concerned but as far as tax income seems to be , well, ineffectual.

    I believe thats because we’re using Alice in Wonderland figures……

    As far as it goes it depends on what the markets think when compared with other countries – I mean Argentina isn’t going to be on the list but US of A and US of E will be.

    Are we any better?

    Anecdotally in the past 3 / 4 weeks traffic around my area has become lighter. I had seen more traffic begining of the year , now it seems to have tailed off. even after taking into account the schools were off , and Ascot and Golf doesnt seem to have affected it , except in small areas

    So I would not be too surprised at the economy taking a downturn in the next few months – whether the HMG figures will reflect this is open to discussion (!) .


    PS : I seem to remember HMG lowered the income tax taken from the hoi polio ( personal allowances ) and also dropped the tax rate on companies in a effort to boost the economy , just like the strength of the pound it doesnt appear to have done much…..

    1. Noo 2 Economics says:

      “PS : I seem to remember HMG lowered the income tax taken from the hoi
      polio ( personal allowances ) and also dropped the tax rate on companies
      in a effort to boost the economy , just like the strength of the pound
      it doesnt appear to have done much….”

      Yes it has – helped increase GDP (even ignoring the silly revisions to calculation) and er, reduced tax revenues, and that’s even after the VAT hike!

      Clear evidence, I submit that we’re the wrong side of the Laffer curve which can only be fixed by reducing regressive taxes like VAT and upping progressive tax like income tax, particularly on high rate payers and before you start, yes I am one of the high rate payers so I’m effectively shooting myself in the foot but I see it will be better for the whole economy and to a lesser extent for me.

      By the way UK GDP won’t shrink this year – at worst growth will flat line, next year GDP and inflation wise (cos inflation certainly has not gone away – the £ cannot go up indefinitely) is another matter…..

      1. Pavlaki says:

        Many people want the rich to pay more but the stats I have read indicate that there just aren’t enough higher income people to make a significant difference.

        There are some differing views about the UK economy but one thing I do observe from my travels – it could be worse, much worse! You just need to cross the channel to see one example. I think that overall the government are not doing too bad a job in difficult circumstances. Yes some things could be better managed but that is always going to be the case.

        1. Noo 2 Economics says:

          My unarticulated argument was that as VAT reduces (causing a fall in revenue for 1 – 2 years) more goods/services will be purchased increasing company profits and therefore corporation tax.

          Once industry sees increased demand it will respond by increasing the workforce (assuming it has not been carrying slack and has found no new productivity gains), which decreases unemployment/social security payments and further increases demand, leading to higher sales and recovering VAT revenues in spite of the lower rate alongside further increased corporation tax on even more extra profits besides the extra income tax and National Insurance revenue from the the newly employed – a virtual reinforcing circle – until the next problem arises of course which would probably be inflation.

          I don’t see myself as rich, merely a higher rate payer…

          1. Noo 2 Economics says:

            …and just for completeness the reason I advocate higher income rates on high rate payers is that:

            1. They can afford it

            2. It will partially ameliorate the initial losses of VAT revenues incurred following a VAT rate cut and in my case anyway would not lead me to leave the country or decide to work less hours in order to reduce my tax rate.

            I live here for many reasons which have nothing to do with tax and I work because I enjoy my work. I also happen to do OK money wise.

  4. Anonymous says:

    Hi Shaun,

    We have had bank runs on KTB (corporate commercial bank) which closed doors on savers trying to withdraw money. I’m told they hold much govt funds due to having “connections”, which the state may lose. I expect taxpayers to pick up the bill for another failed bank, while another political insider gets to buy the assets cheap.

    For now various supervisory people are suspended. Not holding my breath for any prosecutions.

    1. Anonymous says:

      Hi ExpatInBG

      Thanks for the reminder of this. As I checked the news I spotted this from Tuesday on the same site.

      “Bulgaria’s bank system is stable, with high liquidity and capital adequacy, said the country’s central bank BNB.”

      What was that about never believing anything until it is officially denied! I also notice post intervention the claims that the bank did not fail etc. Of course it did not as they got in first.

      I recall your warnings about the Bulgarian economy and note these two facts from the BNB economic review.

      “According to the seasonally adjusted data of the Labour Force Survey, in the fourth quarter of 2013 the level of unemployment slightly increased from the comparatively constant levels of the first three quarters and reached 13 per cent.”

      “In the first two months of 2014 the HICP rate of decline accelerated to -2.1 per cent on an annual basis (-0.9 per cent at the end of 2013).”

  5. Doubting Dick says:

    I might be cynical but George Osborne might have brought forward projects into last financial year to pump up the economy and create bad figures which will flatter next year’s pre-election numbers.

    1. Anonymous says:

      Hi Doubting Dick

      If there was any sign of this then it was in the net investment figures in the official release.

      “In May 2014, central government net investment was £2.1 billion, which was £0.7 billion or 51.9%, higher than in May 2013, when it was £1.4 billion.”

      However this is an area where there is plenty of fog as the numbers were impacted by the Royal Mail pension transfer.

  6. therrawbuzzin says:

    Imputed rents, property bubbles, prostitution and drug peddling do not contribute much to the Exchequer.
    My view is that our real economy isn’t doing great, and people KNOW they have overstretched themselves in the housing market, but have done so believing they had little choice, so they are very frightened of a return to “normal” interest rate levels, and their behaviour as consumers will show it.
    Govts. can lie and massage figures all they like, but evidence ALWAYS shows elsewhere, sooner or later.

    1. Anonymous says:

      Booming property bubbles do increase taxes while the bubble inflates, but when the inevitable bust occurs – they make the budget position worse.

      Spain had a surplus before it’s property market imploded. GB’s boom time deficit is horrific in hindsight considering the huge stamp duty receipts.

      Problem is that stamp duty receipts are pro-cyclical, therefore they make the deficit worse in a bust

      1. therrawbuzzin says:

        Not if it’s your home.
        Stamp duty? A pee in the pond.
        Approx 2% of overall Govt. taxation.

  7. Noo 2 Economics says:

    Hi Shaun,

    The trouble is you’ve strayed into politics – how are you going to sell a load of cuts, particularly ones that hurt the voters’ families (health care, social services), implement them and then get returned for a second term?

    Clearly Ravin Dave and Boy George have gambled on GDP growth to be higher than it has been to take tax revenues beyond public expenditure (as did the other 2 parties in their manifesto’s at the last election) and the gamble has not paid off! That’s no problem though because they can just pass the bill to the taxpayer to take care of.

    Re your essay on official figures I have now lost pretty much all faith in them and am happy to rely increasingly on anecdotal evidence as it can be no less accurate then official figures especially after September….

    1. Anonymous says:

      Hi Noo2

      I wrote about the impending issues and the fantasy economics of our political class at the time of the last UK General Election.

      “Forecasts for the UK fiscal deficit going forward do not look good. Unfortunately they were based upon unrealistic economic growth figures so in fact they are even worse than they appear. As I wrote above this year is showing signs of growth but 2011 and 2012 had official growth forecasts of 3% for each year”

      So whoever was in charge we were always likely to see more persistent fiscal deficit than promised/forecast. So the UK political class keeps gambling especially if we note how even high economic growth does not seem to have helped much so far.

  8. therrawbuzzin says:

    Austerity was never anything more than an excuse for an attack on social provision.
    That’s why Carnage was fooled about unemployment; with 40% of those who had been removed from disability winning their appeals, not swelling the ranks, like he had been led to believe.

    1. Anonymous says:

      Hi therawbuzzin

      However it is spun we have ended up a fair distance away from the underlying plans. In the latest fiscal year the original plan was for the UK to have a fiscal deficit of £85 billion as opposed to the £107 billion it turned out to be.

      The sort of thing described below is pretty shameful when you consider the type of person who is being affected.

      1. therrawbuzzin says:

        Thanks Shaun.
        As carer for my disabled and chronically sick wife, I was disgusted with the treatment of those like her.
        In the notes for PIP was advice on walking distances, which stated that if you were not sure how far you could walk, to count each pace as 0.9m (3ft).
        I’m ex-services, and I know for a fact that a marching pace is 30″.
        So the govt. advised chronically sick and disabled people, who could shamble along at best, to regard their pace as six inches longer than a Royal Marine Commando’s.

  9. Anonymous says:

    Shaun, I loved the reference to that great Diana Ross song. The lyrics that follow it also seem quite appropos to your column:

    Why must we wait so long
    Before we’ll see
    How sad the answers
    To those questions can be.

    Andrew Baldwin

  10. David Lilley says:

    Shaun has introduced us to the WGA and it is fantastic, the new Doomsday Book.
    When we all wondered about the quantum of PFI and the public sector pensions liability and some estimated that national debt was four times that stated, here we have the answers.
    PFI may have bankrupted two NHS trusts but the quantum is far less than we thought when we were putting in freedom of information requests to assess the value of off balance sheet PFI and getting no information back.
    Public sector pensions liability is also much less than we thought.
    My big take home is that public sector pay is now 14% higher than that of a worker doing the same work in the private sector. When it was 8% higher they were getting 44% more after accounting for lower hours, more holidays and golden pensions. It must be 50% higher per unit of effort today.

    1. Noo 2 Economics says:

      “My big take home is that public sector pay is now 14% higher than that of a worker doing the same work in the private sector”

      Where do you get that from? Are public sector jobs directly comparable to Private Sector jobs?

      1. David Lilley says:


        Thanks for coming back to me.

        I get the 14% difference from page 47, section 6.3 of the WGA which states that puiblic sector median earnings are £24,147 and private sector median earnings are £21,113. A difference of 14.37% cf. 14.02% in the previous year.

        The 44% public sector uplift came from Policy Exchange some years ago when public sector pay was 8% higher than comparible work in the private sector. As 8% becomes 14% so 44% becomes 50%, a 6% uplift.

        It is often sited that public and private sector jobs are different but this is plainly mischeivious. We have carers, nurses, doctors and teachers in both sectors. We have manual, semi-skilled, skilled and professionals in both sectors. We have entrants at 16, 18 and 22 years old in both sectors. There is massive homogenity.

        The public sector entrant will get 50% more for his lifetimes efforts that his peer in the market economy. And that is down to an unfair market, an oligopoly, a cartel, or in one word, a union.

        1. Noo 2 Economics says:

          Ok thanks David,I see where you’re coming from I think but the lower hours/more holidays/golden pensions myth is just that.

          How do I know? Because I have worked variously in private industry (civil engineering) civil service (DWP) which I note is differentiated from public sector in the table to which you refer and am now self employed. So I have covered all bases and here are my experiences:

          1. My hours in private industry were the same as the civil service but II received a shed load more than the civil service when taking into account the responsibilities I had in each sector.

          2. I received 5% more annual leave in the civil service compared to my private sector experience.

          3. There was indeed no pension in my private sector company but most companies at that time had what was considered to be bog standard defined benefit pension based on 1.25% of your pay for each years’ service – I was just in the wrong company.

          4. I have friends who are employees in private industry still in defined benefit pensions some of whom are earning 1.65% of salary for each years’ service whilst the rest are earning 1.25% of salary for each years’ service so the 1.65% group must be on “Diamond pensions” whilst the 1.25% group are on “Golden pensions”(although like the civil service these schemes are now closed to new entrants).

          5. My next door neighbour pursued a redundancy at the private sector Insurance company she worked for and obtained an identical job in another private sector company on less pay where she has to work 37 hours a week which she was complaining about to me bitterly as when at the Insurance company she worked 35 hours a week!! Had she obtained a job in the civil service she would have also found she was working 37 hours a week.

          My point about #5 is that there is great variation within the private sector and it is silly to try to come up with an “average” and as we all know the median is not a particularly accurate average – I much prefer the mode.

          Just to top it off I thought the civil service was so er, “cushy” that I actively pursued a redundancy leaving 7 years ago and as the saying goes never looked back.

          Now, I make 2.5 times my civil service earnings for slightly less hours and take holidays when I want (not when my manager allowed me to which was always an argument) although I do only choose to take about 65% of the holidays I received in the civil service. Nevertheless, even factoring in the whole 2 extra weeks a year I work over the civil service and then deducting my slightly lower weekly hours we end up with the fact that I work a whole 28 hours a year more than when I was in the civil service for 2.5 more times more pay (which I negotiate myself and don’t rely on the “Union” to which you refer) and a similar level of responsibility.

          As Shaun has adequately demonstrated in this blog official stats cannot be trusted, you are no worse off following your instinct and probably better off.

          Ask me if I want to rejoin the civil service/Union.

  11. Anonymous says:

    Hi Drf

    It is the whole standard of debate that is lacking. We have so many “experts” writing and discussing an austerity as if there have been outright cuts whereas in fact it is the rate of growth of expenditure which has been cut. Is that as good as our establishment and political class can do?

    I know that there have been cuts as for example a friend’s wife was made redundant from her part-time job with Kent council. The library local to me (Battersea Park) opens a say a week less and so on. But if we look at the numbers we see that they do not fully reflect this,somewhere there have also been increases. If we look at the so-called elite there has been enormous expansion of the House of Lord often with an anti-democratic theme as politicians who lose elections seem to just switch codes and step over that line.

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