Inflation hits 5.2%, but falling commodity prices provide light at the end of the tunnel - ITEM Club

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

  • Higher energy prices and base effects were always going to take inflation above 5%
  • But there is light at the end of the tunnel from falling commodity prices
  • Today’s figures have few implications for either monetary or fiscal policy

“There are no real surprises in today’s data – the combination of higher energy prices and unfavourable base effects meant that CPI inflation was always likely to breach the 5% barrier in September. There is a possibility that the headline rate may nudge higher still in October.

“In the short-term this is going to intensify the squeeze on household finances and reinforce the weakness in consumer spending. Real wages have been falling persistently for most of the past four years and the spending power of the average household has fallen by around 5% since the beginning of 2008; in the period from 2000-07 it had grown by around 2.5% a year, so this represents a marked turnaround.

“However, there is lots of light at the end of the tunnel, with global commodity prices having come down sharply in recent weeks, which should feed along the supply chain to consumers over the coming months. With the VAT increase and the sharp rises in petrol prices also set to fall out of the inflation calculation in early 2012, we are confident that inflation will be back at the 2% target by this time next year. This should ensure that spending power begins to increase again, providing some comfort for the hard-pressed consumer.

“Today’s data has few implications for policy. The Bank of England has always acknowledged that inflation was likely to move above 5% in the autumn and their arguments in favour of it falling back sharply thereafter still hold.

“The OBR’s forecasts for the public finances were based upon a forecast of CPI inflation being 4.3% in September, rather than the 5.2% reported today, so the larger uprating of benefit payments will have some negative implications for the public finances. However, given that gilt yields have substantially undershot the OBR forecast, any increase in benefit payments will eventually be offset by lower debt interest payments, so we do not think that today’s data will have significant implications for the government’s austerity plans.”

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