Inflation surprises on the upside | EEF

Inflation surprises on the upside

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The CPI inflation figure surprised on the upside today increasing at 1.3% in the year to October, up from 1.2% in September. However, this is hardly a signal of returning inflationary pressures in the economy. Rather, it reflects normalisation after last month’s unusually low inflation data proved to be temporary. Weak global economic conditions and the US energy boom depressing fuel prices should support a low inflation environment in the UK for the foreseeable future.

Most of the increase in prices is accounted for by smaller falls in transport costs – transport prices fell by 1.1% between September and October compared with a larger fall of 1.5% between the same two months a year ago. On the other hand, food and motor fuel prices, which historically put upward pressure on the 12-month CPI rate, are currently reducing it by 0.3 percentage points. Food prices fell by 1.6% and motor fuel prices by 4.8% in the year to October 2014.


Does it change the BoE rate decision?

No. The figure is in line with BoE expectations of soft prices for the short to medium term, with inflation now below the 2% target for 10 consecutive months. Given the current economic outlook, inflation is set to hover below the BoE target for the next three years.

While the latest ONS figures showed some pick up in wage growth there appears to be enough slack in the economy to stave off substantial increases in inflation. A lot will depend on the behaviour of productivity; if productivity continues to disappoint then inflationary pressures on wage growth could put the heat on the BoE to bring a hike forward.

More good news for manufacturers

The Producer Price Index fell for the fourth consecutive month by 0.5% in the year to October, unchanged from last month. The overall price of materials and fuels bought by UK manufacturers for processing fell by 8.4%, compared with a fall of 7.4% in the year to September, the highest rate of deflation since September 2009.

This is good news for the production industries, as lower input costs combined with a strong domestic market could work to sharpen manufacturers’ margins within the UK. For export-intensive manufacturers lower input costs could help to compensate for some of the margins eaten away by a strong pound.


The only indices to increase over the year where ‘other home-produced materials’ and ‘imported metals’ which rose by 8.6% and 0.2% respectively. The main downward contributor to input prices was crude oil which fell by a whopping 21.6%. This is due to a combination of increased US production, weak demand in Europe and Asia, and the autumn seasonal drop in demand and refinery maintenance. Home produced food also fell considerably by 11.9%, mostly down to a large drop in crop and animal production.


Output prices also fell but a slower rate than input prices. Petroleum product prices fell by 7% in the year to October, compared to a 7.9% in the year to September, triggered by a fall in the price of diesel and gas oil. Food product prices continue to fall with a decrease of 2.8% - the highest rate of deflation ever seen for this product category. However, core factory gate prices, which exclude the more volatile food, beverages, tobacco and petroleum prices, rose by 0.1% on month, reflecting the minor increase in this month’s CPI inflation rate.



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