UK inflation rate falling faster than expected
Real wages in the UK could see growth for the first time in over a year, according to commentators. The news follows a faster than expected fall in inflation rates, which hit a peak in November.
20 March 2018The UK inflation rate in February fell to its lowest since July last year as the fall in the value of sterling after the Brexit referendum began to work its way out of the system.
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Andrew Sentance, a former Bank of England policy-maker and now senior economic adviser at PwC, said, “It is not a surprise to see UK inflation starting to fall back. Forecasters were expecting price increases to ease back this year. But the rate of reduction is likely to remain slow and volatile. The fact that Easter is early this year could push inflation back up again in March.“This fall-back in inflation therefore provides little reason for the Bank of England to hold back from gradually raising interest rates.“The UK recovery is now nearly nine years old, and yet our official interest rate is exactly where it was nine years ago. A further interest rate rise would be justified this spring – which would show that the UK is following the lead of the US Federal Reserve in embarking on a policy of gradual and careful interest rate rises.”Jeremy Cook, chief economist at WorldFirst, predicted that pay rises could overtake inflation soon. “Following the decision by the ONS to exclude pork pies and nightclub bottled lagers from the inflation basket, we will soon get to a point wherein the declines the pound suffered following the EU referendum go a similar way,” he said.“CPI is the lowest since July of last year and while wages are hardly setting the world alight, we could be within a few months of real wages turning positive for the first time since the beginning of last year.”
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Inflation lower than expected
The Office for National Statistics (ONS) said last month’s rate was down to a lower-than-expected 2.7 per cent from three per cent in January. Last November, the consumer price index (CPI) stood at a six-year high of 3.1 per cent.On Wednesday, the ONS will publish the latest earnings figures, which are expected to show a considerable narrowing of the gap between pay increases and the inflation rate.Phil Gooding, head of CPI at the ONS, said, “A small fall in petrol prices alongside food prices rising more slowly than last year helped pull down inflation, as many of the early 2017 price increases due to the previous depreciation of the pound have started to work through the system.“Hotel prices also fell and the cost of ferry tickets rose more slowly than last year, when prices were collected on Valentine’s Day when many people could have been taking mini-breaks.“House price growth remained steady, with prices increasing strongly across much of the country, although London and the north-east are both lagging behind.”Real wages expected to grow
The main upward pressure on the RPI came from a monthly rise of 1.7 per cent in the cost of clothing and footwear prices.Mel Stride, financial secretary to the Treasury, said the latest data showed government policies were helping families cope with inflation and suggested real wage increases would soon start overtaking the CPI.“We know families feel the cost of living at the end of every working week,” he said. “From next month, a typical taxpayer will pay £1,000 less income tax than in 2010. “And we are increasing the National Living Wage, which is already helping the lowest earners see their pay rise by almost seven per cent above inflation. This is part of our plan to build an economy that works for everyone.”Related stories:
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Andrew Sentance, a former Bank of England policy-maker and now senior economic adviser at PwC, said, “It is not a surprise to see UK inflation starting to fall back. Forecasters were expecting price increases to ease back this year. But the rate of reduction is likely to remain slow and volatile. The fact that Easter is early this year could push inflation back up again in March.“This fall-back in inflation therefore provides little reason for the Bank of England to hold back from gradually raising interest rates.“The UK recovery is now nearly nine years old, and yet our official interest rate is exactly where it was nine years ago. A further interest rate rise would be justified this spring – which would show that the UK is following the lead of the US Federal Reserve in embarking on a policy of gradual and careful interest rate rises.”Jeremy Cook, chief economist at WorldFirst, predicted that pay rises could overtake inflation soon. “Following the decision by the ONS to exclude pork pies and nightclub bottled lagers from the inflation basket, we will soon get to a point wherein the declines the pound suffered following the EU referendum go a similar way,” he said.“CPI is the lowest since July of last year and while wages are hardly setting the world alight, we could be within a few months of real wages turning positive for the first time since the beginning of last year.”
For related news and features, visit our Brexit section. Relocate’s new Global Mobility Toolkit provides free information, practical advice and support for HR, global mobility managers and global teams operating overseas.
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