Inflation Continue to Inflate in October While Food Prices Drop

Consumer price inflation ratcheted up to 1.3 per cent during October, while the price of food, petrol, and plane tickets fell less than they did in October of last year ñ according to official figures.

This is a change from September, where there was a rise in the CPI rate of inflation from a 5 year long low of 1.2 per cent, but without a rise in food prices. Indeed, food prices appear to have remained consistent for six consecutive months, a record long period of food deflation in the last 14 years, according to the Office for National Statistics.

It is believed that inflation has increased during October due to petrol prices falling at almost half the rate as in the previous year.

Concurrently, the price of non-alcoholic beverages and food fell by 1.4 per cent. This has put a stamp on the longest period of declining food prices since the year 2000, and comes in part as a consequence of the on-going price war between supermarkets as they strive to grab larger portions of the market-share.

Meanwhile, the Bank of England has said that it predicts that CPI inflation will drop below 1 per cent during the next six months, with the effect of requiring governor Mark Carney to write to the Chancellor.

Economists agree that the tiny increase in inflation in October was an anomaly and that there are expected to be falls in price pressures in the near future, which would alleviate some of the pressure on household budgets.

Chief economist Jeremy Cook at international payments company has commented that although there has been an increase in CPI that inflation would continue on a downward trajectory.

Cook added that any consumer that has been making purchases of electronic goods, petrol, or clothing within the last few weeks should know first-hand that there are a number of bargains and discounts on offer.

Further to this, Cook added the comment that ìNovemberís number is lower than Octoberís and could easily hit 1 per centî ñ and that this increase would overshadow the recent wage improvement and add greater pressure on wallets heading towards Christmas.

He also went on to say that retailers would go on to cut prices going ahead into the holiday period, until an increased wage strength gives them the mobility to increase their margins.

Meanwhile, Samuel Tombs of Capital Economics said ìThe slight rise in UK CPI inflation in October seems likely to be just a blip in its downward trend.î

Tombs went on to say that a freeze in the gas and electricity tariffs this year is likely to decrease CPI, while the rate of inflation was yet to fully reflect the fall in import or producer prices.

He added:

‘As a result, CPI inflation is still on course for a sub-1 per cent rate soon that would require Mark Carney to reach for his letter-writing pen, and looks set to remain well below the 2 per cent target throughout 2015.

‘As such, low inflation will provide further support to households’ real incomes at a time when other sources of support for the economic recovery are fading and should enable the MPC to raise interest rates only gradually over the next couple of years.’

Markit Chief economist Chris Williamson said:

The concern at the Bank of England is that low inflation could turn into deflation, inducing another economic slump as consumers defer purchases in the hope of lower prices in the future.

‘The Bank’s main priority is therefore to ensure that economic growth remains robust in coming months to stop inflation falling even more than currently projected, which suggests any hike in interest rates remains a long way off.’

The environment of low inflation, combined with the despair regarding the world economy has caused economists to put a lid on the expectations for when the Bank might increase interest rates from 0.5 per cent to as far back as the year 2016.

Simon Wells, the chief UK economist at HSBC has stated that he is going to be making a large revision to his prior predictions as he now expects that a first hike in the base rate will occur in the early part of 2016 as there is some uncertainty around the general election, a decrease in expected growth, and housing market which is looking to be less strong.

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