Today's increase was always likely to happen, but inflation could move above 3% next month, says ITEM Club

18 June 2013

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s inflation figures

  • Base effects meant that this increase was always likely to happen
  • Inflation is likely to briefly move above 3% next month
  • One of Mark Carney’s first acts will be to write to the Chancellor to explain the overshoot

“This increase was always likely to happen because of the strong base effects coming through and the fact that April’s downward surprise came from the volatile air fares component and was always liable to unwind.

“Indeed, these base effects are also likely to ensure that the CPI measure rises further in June, probably to 3% or higher, meaning that one of Mark Carney’s first acts will be to write to the Chancellor explaining the overshoot.

“Otherwise the picture is little changed. The producer prices release suggests that there is little in the way of inflationary pressures coming along the supply chain. And inflation should cool from the autumn as food and energy prices rise by less than they did last year. Nevertheless, we think it unlikely that we will see inflation move back to the 2% target in the foreseeable future. Though earnings growth is weak and companies have little pricing power, the persistence of higher inflation in administered & regulated prices – such as university tuition fees, rail fares and energy and imported goods - means that it is going to be very hard for the MPC to get inflation back to target.

“These figures mean that the squeeze on real earnings continues, although the large increase in the income tax personal allowance provides a considerable offset this year and should mean that most will see some modest improvement in their spending power.”