End of wage squeeze on horizon as inflation falls to 2009 levels

CONSUMER prices are now rising at the slowest pace in four and a half years, a dramatic turnaround which could end the pressure on family incomes from years of above-target inflation.

Official figures released yesterday show that the consumer price index (CPI) rose by only 1.6 per cent in the year to March, the lowest level since late 2009. In comparison, weekly earnings rose by 1.7 per cent in the year to January, indicating that real wages may now finally begin to grow again after years of decline and stagnation.

Inflation was far above the Bank of England’s two per cent aim for most of the period since the financial crisis, but fell back to target in December, and has since slipped lower. Immediately after the crash, CPI dropped sharply, falling to a low of 1.1 per cent. Discounting this period, inflation was at its lowest for very nearly a decade last month.

“Looking ahead, we continue to think that a combination of stable commodity prices, falling import prices and recovering productivity will push CPI inflation as low as one per cent before the year is out,” said Samuel Tombs of Capital Economics.

However, Nick Beecroft of Saxo Bank disagreed, suggesting that rising wages would keep inflation from declining much further: “I expect the inflation picture to seem much less benign by the third quarter,or the fourth quarter at the latest.” Transport costs were one of the largest categories in which prices have fallen in the past year, down by one per cent over the 12 month period. Alcohol and tobacco prices added some upward pressure to the index, rising five per cent in the same space of time.

Food and non-alcoholic beverages, which have been some of the major contributors to higher inflation since 2009, rose in price by just 1.7 per cent in the year to March, dropping by 0.5 per cent from February.

“After years of above-target annual CPI rises, then coupled with lacklustre growth or even retrenchment, below-target inflation at the same time as substantive recovery is highly encouraging,” said Ben Southwood of the Adam Smith Institute.

Despite the fresh potential for wages to start outstripping inflation once again, the cumulative drop in real earnings has reduced them to levels last seen around a decade ago.