Economists predict return to deflation

Sarah Davidson

August 14, 2015

Although consumer price inflation held steady at 0% in July Samuel Tombs, senior UK economist at Capital Economics, said: “Domestic price pressures are still weak, suggesting that inflation will only strengthen gradually next year, enabling the MPC to raise interest rates at a very slow pace.

“Oil prices have been on a downward trend since June and they usually affect petrol prices very quickly. But retailers have not yet passed on the recent fall in oil prices at the pump.”

Tombs said core inflation “seems likely” to have held steady at 0.8% in July. The non-food shop prices index suggests there is scope for core goods inflation to ease a little, perhaps reflecting some delayed pass-through from the sharp fall in oil prices at the end of last year.

But he noted that clothing inflation is likely to pick up from June’s -0.8% annual rate which was depressed by the slightly earlier timing of the summer sales this year compared to 2014.

He added: “In addition, the strengthening of import price inflation a year ago might now be putting some upward pressure on core inflation.

“It usually takes a year for changes in import prices to filter through to shop prices. So sterling’s recent appreciation will bear down on consumer prices next year, not this year.”

As a result, the economist’s central forecast is that CPI inflation held steady at zero in July while it is likely to turn negative again for a couple of months.

Tombs added: “Although pay growth has risen, productivity is reviving too, keeping a lid on firms’ unit wage costs.

“Meanwhile, weak growth in global demand and a supply overhang should keep commodity prices subdued. As a result, the MPC should be able to take its time over raising interest rates next year.”

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