No surprises in today’s inflation data – CPI hit a record low of 0.3%, widely anticipated given the significant decline in oil prices, the on-going contribution from fall food prices and the recent forecast updates presented by the Bank of England
Not everything is falling
Clearly falling prices can be a cause for concern, but the spectre of deflation not yet seen as something to panic about. The source of the price falls will be good for households this year providing a bit more disposable income for other discretionary purchases. We are likely to follow other forecasters and nudge up our expectations for consumer spending when we revise our economic forecasts later this month.
The Chart below also shows that disinflation is not widespread – inflation in services has been holding steady at over 2% for the past year and core CPI inflation recorded a very modest increase in January.
The falling price of goods is more marked and in contrast to the lowest on record CPI trend reported today, negative goods inflation is something we have seen more recently, back in 2002.
Falling at the factory gate
Falling goods prices are also being driven by a fall in some major input costs, as noted in the producer price series also released by ONS today. The price of manufactured goods was down 1.8% on a year ago in January. Again – largely oil and food driven. Excluding these items factory goods prices posted a small increase of 0.5%. Price increases were posted in textiles, machinery and non-metallic minerals (shorthand for bricks, glass, ceramics and cement products)
What impact will all this have on pay?
The Bank was keen to stress in its Inflation report that while short term expectations about the path of inflation have fallen, other measures which track medium term expectations remain consistent with the 2% target.
It is likely that recent falls in CPI inflation will have a bearing on wage agreements in the major pay rounds in January and April. This chart from a survey by the Bank’s agents provides a neat picture of the ups and downs in pay decisions.
EEF’s forthcoming Pay Bulletin will shed some light on how these factors have played out in manufacturing in January pay settlement.
A couple of years ago my colleague developed the pancake index – the weighted cost of pancake ingredients. Today is a good day for pancakes – they haven’t been this cheap since March 2012!