FXstreet.com (Barcelona) - UK inflation held at 2.7% in
December, marking the thirst full year of above target price rises
notes Vicky Redwood, Chief UK Economist at Capital Economics.
She feels that inflation is likely to stay close to this rate in
the near term, pushing real pay down further this year, but she
still expects it to drop back further ahead. She adds, "We already
knew that the recent rises in utility prices would add about 0.25
percentage points to inflation in December. All six of the main
utility companies announced rises towards the end of last year, and
four of these were captured for the first time in December's
Indeed, she continues to say that she this might push overall
inflation up a bit, but in fact, this effect was offset by the
combination of a small fall in petrol prices and a drop in the core
rate from 2.6% to 2.4%. She writes, "This was the first time since
July that core inflation has fallen. But relatively little of it
was due to retailers discounting more heavily in response to
sluggish consumer demand over the festive period. (In fact, core
goods inflation rose from 0.4% to 0.6%)."
Instead, much of the drop in the core rate just reflected a
temporary drop in airfares inflation, due to the timing of
Christmas relative to when data on prices are collected. This alone
knocked about 0.1 percentage points off headline inflation and will
probably be at least partly reversed in January. Indeed, it still
looks possible that inflation will get to, or above 3% in the next
few months, and will stay relatively high for most of this year.
With nominal pay growth below 2%, Redwood notes that this means a
further squeeze on real pay.
However, she adds, "as the upward food and energy effects fade, we
continue to expect inflation to fall back below its target towards
the end of the year - or sooner, if commodity prices fall sharply.
Note that today's producer prices data showed that price pressures
further up the pipeline remain contained."
Producers' output prices edged down by 0.1% m/m in December, with
the annual rate at a relatively benign 2.2%. Although manufacturing
surveys point to a pick-up in output price inflation in the coming
months, Redwood doubts that firms will achieve this when industrial
output is still so weak.