Experts hail ‘peak inflation’ after December dip to 3.0 per cent

Inflation dropped back to 3.0 per cent in December, from 3.1 per cent in November - the highest level since March 2012.

The latest figure published today by the Office for National Statistics (ONS) also marks the first dip in inflation since June, and fuels hopes that November’s rate of 3.1 per cent was the peak.

Commentators welcomed the latest data as a small step in the right direction for both consumers and the Bank of England.

However, they conceded that the squeeze on consumers was likely still appreciable in December and inflation of 3.0 per cent is expected to be well above earnings growth - which was limited to 2.3 per cent in October and to 2.5 per cent in the three months to October.

Reacting to today’s announcement, EY’s Item Club said: “We believe 3.1 per cent in November was the peak for inflation and suspect that December marks the start of a downward trend that should hold through 2018. We expect inflation to fall back to 2.1 per cent by the end of 2018. With sterling’s past sharp drop now having essentially worked through, earnings growth likely to pick up only gradually from current levels and domestic price pressures still looking limited, inflation should fall back significantly as 2018 progresses.”

However, analysts pointed to the recent rise in Brent oil prices to a three-year high of US$70/barrel as a risk factor for inflation but this will partly be countered by sterling recently rising to its highest level against the dollar since the June 2016.

A rise in producer output inflation to 3.3 per cent in December from 3.1 per cent in November also could be a sign that inflation could prove sticky. However, input prices rose just 0.1 per cent in December causing the annual rate of increase to slow to 4.9 per cent from 7.3 per cent in November.

EY said that within such an environment, it expects the Monetary Policy Committee (MPC) will most likely hold off raising interest rates again until August, when it expects a hike from 0.50 per cent to 0.75 per cent.

Howard Archer, chief economic advisor to the EY ITEM Club he expects that inflation will fall back as 2018 progresses.

He said: “Specifically, we expect consumer price inflation to fall back to 2.1 per cent by the end of 2018. Sterling’s sharp drop in the second half of 2016 should have now largely fed through the pricing chain and the impact of this will increasingly fade. Indeed, sterling is seen modestly firmer overall in 2018 compared to 2017. Additionally, we expect oil prices to eventually ease back with Brent oil averaging $63/barrel over 2018.

“Meanwhile, we suspect that relatively lacklustre economic growth will continue to limit domestic price pressures. Earnings growth seems likely to pick up only gradually as some firms remain keen to limit their total costs in a challenging and uncertain environment. Fragile consumer confidence may also deter some workers from pushing hard for increased pay rises, despite recent higher inflation and a tight labour market.

“Inflation of 3.0 per cent in December still keeps the squeeze very much on consumers; indeed it undoubtedly marked another month of negative real income growth. The latest data shows that total weekly average earnings growth was 2.5 per cent in the three months to October, while regular earnings growth was 2.3 per cent.

“The squeeze on consumers’ purchasing power remains appreciable going into 2018. However, it should ease as the year progresses due to inflation falling back towards 2 per cent by the end of the year and earnings growth gradually picking up, largely as a consequence of recruitment difficulties in some sectors. The December report of business conditions by the Bank of England’s regional agents indicated that a “significant” number of their contacts expected pay awards to rise modestly to a 2.5-3.5 per cent range in 2018 from 2.0-3.0 per cent in 2017.”

Aberdeen Standard Investments chief economist Lucy O’Carroll agreed there was no need for another quick rise in interest rates, but said: “What matters most for the long-term health of the UK economy is improving its productivity performance.

“If we can do that then the Bank of England may be able to keep rates low for a lot longer. But on recent experience, improving productivity is much easier said than done.”

Liz Cameron, Chief Executive, Scottish Chambers of Commerce, added: “Whilst it is too early to say whether this is the start of a long-term reduction in the rate of inflation, the reduced rate will begin to ease some of the pressure on household budgets. However, food inflation still remains at a near four year high and petrol prices rose sharply as the continued impact of Brexit and rising commodity prices and raw materials passed through supply chains. Data from Scottish Chambers of Commerce Network’s Economic Indicator also shows signs of companies potentially seeking to increase prices as it becomes more difficult for firms to absorb increasing cost pressures.

“Wage growth continues to lag well behind and it will be some time before this translates into people having more money in their pockets.

“The Monetary Policy Committee should be in no rush for another rate hike. Keeping interest rates steady is the preferred option for business.”