Sharp drop in the CPI rate reflects deep discounting on the high street as well as the influence of lower oil prices says ITEM Club

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s consumer price index:

  • The sharp drop in the CPI rate reflects deep discounting on the high street, as well as the influence of lower oil prices
  • Inflation rates should continue to slow, albeit at a more measured pace than in recent months
  • Lower inflation should help to kick-start the consumer recovery, as well as giving the MPC plenty of leeway to provide further monetary stimulus

“More good news for consumers with another chunky decline in the inflation rate. The sharp decline in oil prices and its feed through to prices at the pump are clearly having a major impact, but that’s not the whole story. Weak demand, no doubt partly due to the bad weather, has forced retailers to discount earlier and more heavily than normal, particularly in the clothing sector.
“Inflation rates are unlikely to continue to fall at such a rapid rate over the next couple of months. Both oil and petrol prices appear to have stabilised in recent weeks, while the earlier summer sales will mean that the dip in prices we usually see in the latter part of the summer has probably already happened. Nevertheless, we should still see the CPI rate dip below the 2% target by the early autumn, particularly once last year’s big utility price hikes drop out of the year-on-year calculation.
“The combination of high inflation and weak earnings growth has made life very tough for households over the past five years – a basic comparison of the two series suggests a decline in real wages of around 7.5% which has taken spending power back to 2001 levels. But today’s figures suggest that we are now turning the corner. Wages should be able to keep pace with prices over the second half of this year and pull ahead next year, providing a significant boost to household finances and helping to kick-start the consumer recovery.
“These figures will be music to the ears of the MPC, as they look to guide the economy through choppy waters. In addition laying the ground for consumer spending to begin to recover, it also provides the Committee with plenty of leeway to provide further stimulus, should they feel it is necessary.”