Low inflation is unlikely to be just for Christmas.
A combination of lower commodity and import prices, alongside stable energy bills, should mean that consumer price inflation falls to comfortably below 1 per cent in the coming months.
And while the impact of these factors is likely to have faded by the end of 2015 – and pay growth will surely have strengthened – there remains considerable scope for a recovery in productivity to ensure that cost pressures remain subdued.
Output per hour is still about 2 per cent below its peak in 2007, and has fallen a further 10 per cent behind levels in the US since then.
Given the scale of technological advancements and the tendency for countries’ productivity levels to converge over time, the stage seems set for a burst of productivity growth.
That should lead to a prolonged period of low inflation that enables the Monetary Policy Committee to raise interest rates at a measured pace in the coming years.
James Sproule, chief economist at the Institute of Directors, says No.
Nothing is more certain to be wrong than the belief that a recently established economic trend will hold forever more.
From Gordon Brown’s “no more boom and bust” to “China’s economy is going to be bigger than the United States by 2050”, to the belief that “UK inflation will now be permanently lower”, predicting economic trends requires more than just two points on a graph and a ruler.
UK consumer price inflation has fallen recently as a result of declines in food and fuel prices, and we can expect further falls to inflation more generally – the threat of a mansion tax seems to have softened house prices, for example. Indeed, the lingering global economic slowdown might yet take fuel prices down further still.
But to suppose that we have entered a new low inflation era, when we have dramatically increased the money supply and have little control over many of the factors driving inflation, is extremely foolish.