UK Inflation, Jun 2018 - PwC comments

Jun 13, 2018

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Andrew Sentance, senior economic adviser at PwC, comments on the latest UK inflation figures: 

“Inflation remains steady at 2.4%. As we expected, the downward path of inflation has not continued, and there could be a rise next month due to higher petrol and diesel prices.

“Inflation is likely to remain stuck close to 2.5% over the summer and the pick-up in factory gate inflation announced today reinforces that view. That suggests some action is needed from the MPC to bring inflation back to the 2% target, despite worries about the weakness of economic growth.

“We seem to be in a period of stagflation. Inflation is relatively high and growth is weak, with the UK close to the bottom of the G7 growth league and close to the top of the inflation league. The combination of Brexit and the Bank’s reluctance to raise interest rates is creating a very uncomfortable position for the UK economy.”

Ends.

 

"UK CPI inflation has dropped to 2.5% - the second monthly fall in a row and the lowest inflation rate recorded for a year. The impact on inflation of sterling weakness appears to be fading, with clothing and footwear, alcoholic drinks and tobacco, and household goods contributing to this latest reduction in price increases. This is a second piece of good news for consumer spending in two days - following on yesterday's data showing wage growth picking up.
 
"The key issue now on the inflation front is the outlook for the second half of the year. Will inflation stabilise close to 2.5%, or will it continue to fall further, dropping back to the Bank of England's 2% target or below?
 
"It still appears likely that inflation will remain above the target level for the remainder of this year. Though the impact of a weakened pound appears to be dropping out of the inflation numbers, three other factors are likely to exert an offsetting upward pressure on the pace of price increases. Productivity growth remains sluggish, with GDP rising not much above the rate of employment growth. Wage increases are also picking up - and could easily reach 3%per annum in the second half of this year. In addition, a buoyant global economy is likely to continue to push up food and energy prices, with the oil price now already above $70/barrel.
 
"The Bank of England should not therefore treat this latest fallback in inflation as a dovish signal for interest rate policy. The MPC's approach has normally been to look through short-term fluctuations and focus on the longer term influences on the inflation outlook. With unemployment at its lowest level since the mid-1970s, continued UK economic growth, a strong global economy, and inflation likely to remain above-target, there is still a very strong case for a rise in interest rates to 0.75% at next month's MPC meeting."
"UK CPI inflation has dropped to 2.5% - the second monthly fall in a row and the lowest inflation rate recorded for a year. The impact on inflation of sterling weakness appears to be fading, with clothing and footwear, alcoholic drinks and tobacco, and household goods contributing to this latest reduction in price increases. This is a second piece of good news for consumer spending in two days - following on yesterday's data showing wage growth picking up.
 
"The key issue now on the inflation front is the outlook for the second half of the year. Will inflation stabilise close to 2.5%, or will it continue to fall further, dropping back to the Bank of England's 2% target or below?
 
"It still appears likely that inflation will remain above the target level for the remainder of this year. Though the impact of a weakened pound appears to be dropping out of the inflation numbers, three other factors are likely to exert an offsetting upward pressure on the pace of price increases. Productivity growth remains sluggish, with GDP rising not much above the rate of employment growth. Wage increases are also picking up - and could easily reach 3%per annum in the second half of this year. In addition, a buoyant global economy is likely to continue to push up food and energy prices, with the oil price now already above $70/barrel.
 
"The Bank of England should not therefore treat this latest fallback in inflation as a dovish signal for interest rate policy. The MPC's approach has normally been to look through short-term fluctuations and focus on the longer term influences on the inflation outlook. With unemployment at its lowest level since the mid-1970s, continued UK economic growth, a strong global economy, and inflation likely to remain above-target, there is still a very strong case for a rise in interest rates to 0.75% at next month's MPC meeting."
“The good news for economic growth is that inflation remains below the rate of pay increases. So wage-earners are seeing a very modest rise in their living standards. That will provide some support for consumer spending in the second half of this year and into 2019.”
 

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