Consumer price index inflation has been at zero for two months now. But looking ahead, the pressures are in an upward direction. The oil price has recently risen above $60 per barrel and petrol prices are firming up. The labour market continues to tighten, putting upward pressure on wages. And in a growing economy, which is moving into the seventh year of recovery, companies are in a much better position to raise prices.
In the second half of this year, the big oil price falls will start to drop out of annual inflation, pushing the rate up to 1-2 per cent. And beyond that, inflation could rise higher. Services inflation is currently 2.4 per cent, offset by falling goods prices.
But goods deflation is unlikely to last – in the past decade, goods prices have risen 2 per cent a year on average. Inflation will be back soon, and could rise quite sharply if skill shortages and capacity pressures continue to build.
Samuel Tombs, senior UK economist at Capital Economics, says No
Inflation is unlikely to pick up to a rate that would force the Monetary Policy Committee (MPC) to raise interest rates any time soon. The fall in food, energy and import prices should ensure that consumer price index inflation remains close to its present zero rate until the tail end of 2015. And thereafter, we doubt that it will get close to the MPC’s 2 per cent target until well into 2017.
Granted, the unemployment rate has fallen sharply and there are signs that wage growth is picking up. But a revival in productivity should prevent stronger pay growth fuelling inflation. The upturn in business investment over the last year has enhanced the capital stock and, with UK productivity levels now more than 20 per cent below US levels, there is considerable scope for productivity to rise through replication of US methods.
In short, the UK economy should be able to enjoy a favourable combination of strong growth and low inflation for a few more years yet.