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Inflation down, but we’re not out of the woods

There is little doubt that December’s fall in inflation is welcome given the pressures on households and stubbornly below inflation wage rises. But it is only a small fall and we’re not out of the woods yet. What remains to be seen is whether inflation has peaked or if there is more in the pipeline.
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Inflation edging down in December is welcome given the pressures on households and anaemic wage growth. But it is only a small fall and we’re not out of the woods yet. Contributor Jacob Deppe, Head of Trading Infinox.

What remains to be seen is whether inflation has peaked or if there is more in the pipeline. It had been thought that inflation would peak at 3 percent in October only for the markets to be taken slightly by surprise when it continued to rise in November.

Given the recent rise in the Pound versus the US Dollar and the fact sterling is slowly recovering versus the Euro, the argument that inflation was pushed higher by Britain’s weakened currency will gain credibility if inflation continues to fall.

The latest data also focuses attention on the Bank of England’s Quarterly Inflation Report next month, which markets will pore over for indications of how quickly inflation might fall and what that might mean for interest rates.

Continuing price rises are unhelpful for households struggling with below inflation wage rises but perhaps there is a chink of light at the end of the tunnel. For the moment the simple fact is wages are still running below living costs even if the gap has narrowed ever so slightly. If inflation continues to fall, the case for hiking interest rates will be significantly weakened given the lacklustre state of the economy.

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