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UK inflation slips back below zero

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The usual suspect of falling fuel costs, coupled with smaller-than-usual increases in clothing prices pushed the UK inflation rate back into negative territory in September, once again putting no pressure on the Bank of England to lift interest rates. 

The usual suspect of falling fuel costs, coupled with smaller-than-usual increases in clothing prices pushed the UK inflation rate back into negative territory in September, once again putting no pressure on the Bank of England to lift interest rates. The rate of consumer price inflation has now been zero (or close enough to make no difference) since February. It’s expected to climb in the coming months as the big drop in fuel prices falls out of the year-on-year calculation, but core inflation, which strips out volatile components like food and energy, also remains weak at 1.0 percent. This offers little suggestion that underlying inflationary pressures are building in the UK economy, despite continuing strength in wage growth. Figures due out tomorrow are expected to show pay growing at 3.1 percent.

Downside risks to the UK economy are still numerous. Global concerns, especially surrounding China and other emerging markets, have been well-documented, but there are also signs the domestic economy could be faltering. Last week’s PMI survey for the services sector, which accounts for around three-quarters of economic output, showed business activity growing at its slowest pace for more than two years. While the impact of rising wages remains notable by its absence in the inflation figures, I expect the Bank of England to focus on the risks and exercise caution on interest rates. I see them remaining at 0.5 percent into the second half of next year, and quite possibly even longer than that.
 

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