UK inflation edges back into positive territory during November

15th December 2015


Inflation moved back into positive territory in November after languishing at -0.1% in September and October, official numbers have shown.

The Office for National Statistics, confirmed that the cost of living as measured by the consumer prices index (CPI) rose to 0.1% last month.

Maike Currie, associate investment director, Fidelity International however believes that today’s move into positive territory is likely to be short-lived given the massive fall in oil prices and the ongoing supermarket discount wars.

She said: “I expect UK CPI to continue see-sawing around the zero-mark for the near future. Deflation is a double-edged sword which can have wreak economic havoc but can also kick start regenerative economic forces. “

The positive side effect of deflation is that it provides a boost to real incomes. In both the US and UK, falling prices coupled with a strengthening labour market, resulting in job and wage growth, raises real incomes.

But Currie added: “Persistently weak UK inflation means there is little incentive for the Bank of England to raise interest rates. I don’t expect UK interest rates to rise in 2016, and the pace of future rises is likely to be a lot slower too.

“On the basis of the Bank’s own projections, the most we can hope for are two quarter point hikes in 2017, which means interest rates may be just 1% a decade after the start of the financial crisis. In a low interest-rate environment, investors could continue to view equity income as a safe haven and a rare source of yield.”

Looking ahead chief UK and European economist at IHS Global Insight Howard Archer added: “ Consumer price inflation will probably only reach 1% in the third quarter of 2016, 1.5% by end-2016 and 2% around mid-2017.”

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