Inflation Falls Unexpectedly

19 August 2014

Inflation has fallen more than expected  to 1.6% down from 1.9% .  The cost of clothing, footwear, food and non-alcoholic drinks contributed most to the fall.   It may well fall further as the cost of petrol is also falling with oil price at a 10 month low.  

The pound has fallen against most major currencies and will no doubt push back even further the prospect of a rate rise.   Recent talk of a pact between Osborne and Carney to keep interest rates low until after the election will most likely die away if inflation remains significantly below the Bank of England's inflation target.  What is more, wage growth is still at low levels across the economy with rises of only 0.6% over the last 3 months.

What will be the effect of this continuing environment of low interest rates?

  • Asset prices will continue to rise modestly, most particularly housing, as some heat had been taken out of the market with expectations of a rate rise.  Also the cheap pound will encourage capital inflows.
  • The search for a return on investment will see more lending to businesses, particularly in the field of asset based lending and crowd funding.
  • The incumbent government will continue to reap the benefits of a "stable economic environment" leading up the election.
  • Businesses will be able to service historic debts more easily
  • UK will receive a tourism boost!

Until there is some some wage growth and the loss of spare capacity in the economy it is unlikely there will be any rate increases for some time.  

What is more interesting is what is happening on the European Continent.  Italy is back in recession, Germany and France are flat lining and deflationary pressure are building.  This may yet cause further weakening in our own economy.  Watch this space.  Has the Eurozone crisis completely gone away?