As consumer price index inflation reaches a 12-month high, should we expect price rises to accelerate?

Is UK inflation now set to accelerate? (Source: Getty)

Ben Brettell, senior economist at Hargreaves Lansdown, says Yes.

Yes – but not by much, and not because of any inflationary pressures in the underlying economy. The headline rate of inflation continues to be largely driven by volatile fuel prices. Throughout 2015, fuel prices were registering double-digit falls compared with a year earlier. But given how far oil prices have plummeted, the magnitude of these falls is unlikely to be repeated in 2016. For example, in the year to January 2015, the price of motor fuels fell by 16.2 per cent, but in the year to January 2016 the fall was a more modest 7.3 per cent. Last year’s massive falls in fuel prices are likely to be replaced in the year-on-year calculation by smaller drops (or even rises) as 2016 progresses. And this will place upward pressure on the headline CPI rate. However, this should not be mistaken for evidence of underlying inflationary pressures. Core inflation, which strips out volatile components like food and energy, is a better measure of this, and it fell from 1.4 per cent to 1.2 per cent in January.

Maike Currie, an investment director at Fidelity International, says No.

It’s unlikely that price rises will accelerate any time soon. Deflationary forces are sweeping the globe as a slowdown in the developing world and the global manufacturing sector puts a dampener on demand worldwide. Granted, the steepest of the oil price falls will drop out of the inflation equation, but the impact of the collapse in oil is not going away. Nor is the supermarket discount price war, with recent price cut initiatives announced by the likes of Asda and Morrisons. Even when these factors do wane, there are larger structural changes at play that are likely to dampen inflationary pressures – like the automation of the workforce and changing demographics. As populations age, the segment of the population which tends to save more swells, while the working population shrinks. Consequently, savings increase and spending falls, keeping a lid on prices. Meanwhile, technology has made it much easier and cheaper to substitute man for machine, which puts less pressure on companies to increase wages.

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