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Inflation, falls predicted

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Ben Brettell, Senior Economist, Hargreaves Lansdown: For a change, the UK inflation figures have come in as predicted by the majority of economists – a small rise to 1.3 percent. Fuel costs and air fares were the main reasons behind the rise. Both have fallen since last month, but this time last year there was an even larger fall between September and October, leading to an upward impact on the year-on-year figures.

Despite this month’s small rise, the outlook for inflation remains weak. The Bank of England said last week that CPI inflation was likely to fall below 1 percent in the coming months, meaning Mark Carney would once again have to write a letter to George Osborne explaining why inflation has deviated from the 2 percent target by more than one percentage point. Bank of England Chief Economist Andy Haldane said in a speech yesterday that he is watching UK inflation expectations “like a dove”. This is a clear indication that he expects weak inflation to allow the Bank to maintain its ultra-low interest rate policy for some time.

While the UK economy seems in good health, storm clouds are gathering on the horizon. The exceptionally weak economic performance of the euro zone – our largest trading partner – remains a severe threat, while data released this week showed that Shinzo Abe’s radical reforms have failed to prevent the Japanese economy slipping back into recession. Given these threats, and the absence of inflationary pressure, it is difficult to see why the Bank of England would consider raising interest rates at present. I expect them to remain on hold until late 2015 and perhaps beyond.
 

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