Which way will inflation head in 2013?

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At this time last year I wrote a blog on inflation predicting that CPI would be back to target by now.

Mid-way through 2012 it looked like that might well happen. As the arithmetic effects of the VAT-increase fell out of the measure, CPI fell down to 2.2% in September and it looked like inflation was heading back towards the magic 2.0%… but then it ticked up.

Why was this?

In October we saw a larger-than-expected effect on the measure as a result of tuition fee rises. ONS said that the cost of education caused prices to be nearly 0.4 percentage points higher than they were a year ago. This is likely to impact the measure for three years until all students are paying the new fees.

Food prices were another factor that pushed up inflation, rising 3.8% over the year, which contributed 0.4 percentage points to inflation. Poor weather in recent months has resulted in low yields for several foods, particularly potatoes.

Energy price rises were also greater than had been expected this time last year. When energy price rises are combined with rent increases, housing and household services added approximately 0.6 percentage points to CPI inflation.

Looking ahead to 2013 there is likely to be some continued impact on inflation in the next few months following on from recent announcements of increases in household energy bills. There may also be some more pressure from food prices as a result of recent bad harvests in the UK and the US. However, inflation should slow in the latter half of 2013 as oil and food price pressures are likely to ease. We are currently forecasting a return to the Bank of England's 2.0% target in autumn 2013.

So, at the risk of sounding like a stuck record, it looks highly likely inflation will return to target this year.

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