Inflation rate:Rise not a precursor to sustained uptick, but squeeze on real wages will be back on if headline growth holds steady - EY ITEM Club

20 May 2014

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  • Inflation rises to 1.8%, but temporary factors at play….
  • …while house price inflation has cooled a touch…
  • …pointing to the Bank maintaining the status quo

Martin Beck, senior economic adviser to the EY ITEM Club said on today’s inflation figures:

 “After six consecutive monthly falls, April broke inflation’s downward trend with the CPI measure rising from 1.6% to 1.8%. As a result, if headline wages growth holds steady at its March level, the squeeze on real wages will be back on.

“We do not think this rise is the precursor to a sustained uptick. The timing of the Easter break boosted various prices, such as the cost of flights compared with April 2013, while the fall in petrol prices that we saw last April didn’t reoccur this time round. 

“Looking ahead, we expect inflation to stabilise around its current level or even drop a little. The effect of the pound’s climb on already dampening import costs should be increasingly reflected in consumer prices over the next few months, countering any upward pressure on inflation from the economic recovery. And, despite further falls in unemployment, labour costs are set to remain very subdued, which means the effect on inflation from the resurgence in economic activity is likely to emerge only gradually. Overall, the likelihood remains high that the UK is on course to enjoy a sustained low inflation recovery for some time to come.

“Meanwhile, house price inflation, on the ONS measure, cooled a little in March, providing some respite for the Bank from mounting pressure to take action to deflate the housing market. We expect overall house prices to take on a more sustainable trajectory over the next few months. With the MPC seemingly confident that any threat of a housing bubble can be contained using macro-prudential tools and inflation expected to remain below 2% for an extended period, we are sticking to our view that a rise in Bank Rate will not happen until well into 2015.”