UK Inflation Projected To Remain Low

For the first time in five years, UK workers on average wages found that their pay increase was actually marginally above the consumer price inflation figure. This means that their salaries bought marginally more goods this year than last and reversed five years where their purchasing power declined. The Consumer Price Index (CPI) rose by 1.2% in the year to September whilst average earnings raced ahead by 1.3%.

The reason for the differential is not the long-overdue pay hikes from grateful employers to much put upon workers, but rather falling prices due to weak demand (and a significant drop in the oil price – Brent crude fell from $108.6 to $97 over the year to the end of September and currently stands at $80.4).

In the opinion of the Governor of the Bank of England, Mark Carney, inflation is likely to remain subdued for quite some time, meaning that the Bank of England’s interest rate will not be under pressure to increase rates in the near future. Interest rates have been held at 0.5% since March 2009. Mr Carney is expecting that UK CPI inflation will dip below 1% for the next six months as a result of lower food and energy prices and cheaper imports on the back of feeble global demand, notably within the Eurozone. 12 months ago, a pound would buy you €1.19; now it is worth €1.26 – meaning that imports from the EU are 6% cheaper than a year ago. Mr Carney thinks that inflation is unlikely to hit the Bank’s 2% target for another three years.

He was more upbeat about what economists call “wage inflation” and the rest of humanity calls pay increases, suggesting that average pay would rise by 2% next year. This would grant UK workers another modest increase in purchasing power if the predictions hold.