Chris Williamson, chief UK economist at financial data provider Markit
UK inflation slumped to a five-year low in September. In fact, with the exception of September 2009, at the height of the financial crisis, the rate was the lowest seen for a decade.
Data from the Office for National Statistics showed consumer prices rising at an annual rate of 1.2% in September, down from 1.5% in August and lower than expectations of a drop to just 1.4%.
With oil and petrol prices falling, import costs dropping due to the exchange rate, supermarkets engulfed in price wars and wage growth at a record low, it’s hard to see why inflation should do anything other than fall further in coming months.
This more benign inflation outlook should certainly take pressure off the Bank of England to raise rates, and could even add to calls for policymakers to do more to shore up the recovery amid signs that growth could fade in coming months.
While a few months ago, the likelihood was growing that the Bank might need to hike interest rates in late 2014 or early next year, the data are now stacking up to suggest a hike could be delayed at least until next summer, after the general election.
David Kern, chief economist at the British Chambers of Commerce
These figures confirm that inflationary pressures in the economy remain muted and have eased in recent months. With oil and food prices now falling, there is a possibility that consumer price index (CPI) inflation will fall below 1% before the end of this year.
This fall in inflation, coupled with weak wage growth, reinforces our call for the MPC [monetary policy committee] to keep interest rates at their current level for the foreseeable future.
Recent surveys, including our quarterly economic survey, show that the recovery is on track, but is still fragile and faces challenges. Given global economic uncertainties this is clearly not the time to put the recovery at risk with premature interest rate increases. The MPC’s main priority must be to underpin business confidence by giving businesses the stability to plan and invest without any unwelcome surprises.
Rob Wood, chief UK economist at Berenberg bank
We look for a February rate hike, but the risks of a delay are rising with weak inflation and the softer patch the UK economy now appears to be entering.
That being said, core inflation is not all that far from the Bank of England’s target. The Bank should look through the impact of volatile food and energy prices on headline inflation. Movements in world prices are outside UK rate-setters’ control, while monetary policy takes about two years to work through the system, by which time any oil or food price changes today will have dropped out of the inflation figures.
Low inflation gives the Bank room to wait before hiking rates but we expect eurozone sentiment to turn up by the end of the year, UK unemployment to keep falling rapidly and the tightening labour market to show up in gradually improving wage growth over the next 12 months, making the case for a rate hike early next year.
Howard Archer, chief UK economist at IHS Global Insight
Underlying price pressures should be limited for some time to come. While GDP growth is seen holding up well at around 0.6-0.7% quarter-on-quarter over the coming quarters, this should not lead to any marked pickup in underlying inflationary pressures in the near term, given the still significant amount of slack in the economy after extended weak activity.
Earnings growth will likely strengthen only gradually over the coming months, owing to still-appreciable labour market slack. The pricing power of retailers, manufacturers, and services companies will likely remain limited for some time to come, given the spare capacity in the economy and the prolonged squeeze on consumers’ purchasing power, although some companies may seek to capitalise on now extended improved economic activity by raising prices to strengthen their margins. In fact, a further dip in producer prices in August suggests that manufacturers are currently pricing competitively.
Jeremy Cook, chief economist at currency exchange company World First
Inflation expectations are collapsing across developed economies as we close out 2014.
Oil and food are the major laggards but winter apparel sales missing expectations and continuing price cuts to summer lines is bringing clothing retailing into the picture as well.
Food prices are in deflationary territory by 1.4% on the year – the sharpest drop since 2002 – as supermarkets aim to increase their market share through price wars, while the oil price has slumped 24% since June of this year. This has helped consumers, of course, but does little for corporate profitability or for rate expectations.
This is only half of the real wage argument and people will still be seeing real-term pay cuts, even at this five-year low in price rises. It also lessens the pressure on the Bank of England to increase interest rates soon.
I think this is the final nail in the coffin for expectations of a November rate hike, although those had dwindled of late, and puts pressure on our estimates of a February increase in borrowing costs.
Sterling is down 0.65% on the day against the US dollar and 0.7% against the euro.
