New UK inflation data

 

Markit has commented on the UK's inflation data, which was published today:

“UK inflation tumbled to a 15-month low in February, pushed down by lower energy prices and aggressive price discounting by retailers. Further falls are likely in coming months, as retailers continue to struggle to attract hard-pressed consumers, although high oil prices mean the Bank of England's expectation that inflation will drop below its 2.0% target by the end of the year could prove too optimistic.

"Consumer price inflation fell to 3.4% in February, down from 3.6% in January. The annual rate of inflation has now fallen for five straight months, dropping from a three-year peak of 5.2% last September. Retail price inflation meanwhile fell from 3.9% to a 24-month low of 3.7%.

"The rate is likely to continue to fall in the months ahead, with downward pressure on prices coming from weak consumer spending and low wage growth. Although falling, inflation continues to run well above average pay growth, the latest data for which showed just a 1.4% annual increase, meaning incomes are still being squeezed in real terms. At the same time, high unemployment and widespread job insecurity will also dampen consumer spending. Consumers will therefore no doubt continue to seek out cheap prices for the foreseeable future, giving retailers little scope to move away from their current focus on price competition.

"The weak jobs market, which is likely to persist for the rest of the year as public sector job cuts continue, also means workers will remain reluctant to approach their employers for higher pay, suggesting there is little to worry about in terms of a wage-price spiral developing for some time.

"However, the Bank of England’s expectation that inflation will drop below its 2.0% target by the end of the year could prove too optimistic, with oil once again set to provide the biggest headache. Brent Crude at around $125 per barrel means rising oil prices will inevitably feed through to higher prices for a wide variety of goods and services. Most visible is the record prices paid for fuel at the pump, which will not only hit household travel costs but will also push up general transport costs.

"Stickier than anticipated inflation will be bad news for consumer spending and the economic recovery in general. The ‘Misery Index’ – a combination of unemployment and inflation data which gives a basic but useful guide to the pressures facing households and consumers – fell to a two-year low as a result of the latest drop in inflation, but nevertheless remains at a level not seen since the mid-1990s. This historically high level of the index suggests that consumer spending will remain weak in the months ahead.

"However, even if inflation does not fall below the Bank of England's target by the end of the year, price pressures clearly have further to fall over the course of 2012, and the resulting low inflation rate leaves scope for the Bank to add to its existing quantitative easing programme if economic growth shows signs of faltering."

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