CPI falls - but will it continue?

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Annual CPI fell to 2.5% in August from 2.6% in July

A combination of factors put pressure on inflation in August with downward pressure slightly outweighing the upward pressure.

Downward pressure

↓ furniture↓ household equipment and maintenance↓ housing and household services, particularly domestic gas↓ clothing and footwear.

Upward pressure

↑ Transport, particularly motor fuels

The general consensus and indeed the Bank of England's forecasts were for inflation to fall below the 2% target in the latter half of this year.

However, price rises have been somewhat more sustained than thought likely placing a question mark over future movements - will inflation remain higher than the 2% target or fall as previously expected?

A couple of pertinent factors:

  • Transport costs: Petrol prices have already risen since August and oil prices are expected to be higher than previously forecast in the latter half of 2012.
  • Energy prices: SSE have announced they will be increasing domestic gas and electricity prices by 9% from October

If inflation does remain elevated, this would not be good news for consumption, investment and growth

Wages grew only 1.5% in the year to July 2012 so the latest CPI figures show real wages are still falling. If inflation remains higher than the 2% mark for longer, the pick-up in consumer confidence and consumption that was expected later in 2012 is likely to be delayed.

This will have flow-on implications for businesses and may further imminent recovery in investment – which was expected to be boosted by a pick-up in consumption. And of course growth would also be impacted and could be lower in 2012.


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