August inflation fall may prove transitory

 

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The Independent Online

The Bank of England faces a fresh inflation threat next year as prices are driven back up by soaring food and petrol costs, experts have warned.

Consumer prices index inflation eased from 2.6 per cent to 2.5 per cent during August, according to the Office for National Statistics. This was largely thanks to the contrast with a year earlier – when gas and electricity bills were rising – and smaller rises in clothes and footwear prices from a year ago.

But the effect of these was largely cancelled out by average petrol prices jumping by 3.5p a litre on the month to stand at £1.35. Worryingly, Brent crude has risen by almost 30 per cent since bottoming out in June and now stands at just over $117 a barrel.

Although the CPI is set to fall again in September as last year's energy price rises drop out of the figures, analysts said this could be a temporary respite with inflation soon moving back to 3 per cent.

Victoria Clarke, an economist at Investec, said: "From here we do expect inflation to moderate a touch further. However we should caution that we do expect this trend to turn upwards again soon, with sources of upward pressure emerging over the months ahead including from university tuition fees, higher food prices following the recent US droughts and higher pump fuel prices too. We see those pressures as potentially pushing CPI inflation back to the 3 per cent mark by the middle of next year."

The good news for the Bank's Monetary Policy Committee is that core inflation – stripping out volatile energy and food costs – is on the way down, standing at 2.1 per cent. Andrew Goodwin, the Ernst & Young Item Club senior economic adviser, said: "The MPC should have plenty of leeway to provide further policy support, once the current tranche of QE has been completed, should they deem it necessary."

The ONS has also launched a consultation into changing the composition of the retail prices index, which could knock almost 1 percentage point a year off the rate used to calculate many pensions as well as index-linked gilts.

Citigroup's Michael Saunders said: "The OBR reports that a 1 per cent drop in RPI inflation would cut debt service payments by about £3bn for 2013-14, rising to about £6bn for 2016-17. This would be a nice windfall for the Chancellor, although it would not eliminate the prospective overshoot in the UK's fiscal deficit."

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