Inflation down to 2.4 per cent - will the fall continue?

Consumers will feel some relief as inflation continues to fall back from a peak of 3.1 per cent, but the trend may not go on for long.

Everyday money May 24, 2018

The Office for National Statistics (ONS) announced the Consumer Price Index rate of inflation as 2.4 per cent, down from 2.5 per cent last month.

This marks a continued downward trend from a five-year high of 3.1 per cent in November 2017. This is good news for consumers who felt a significant squeeze in 2017 when rising inflation rates outstripped wage growth. Now, however, wages are growing at 2.6 per cent so that means salaries are, on average, worth more in real terms.

The primary reason cited for the fall in inflation is a drop in consumer airfare prices over the Easter period.

The ONS’ other measure of inflation, CPIH, which includes housing costs, recorded inflation at an even lower figure of 2.2 per cent.

Unfortunately, there are significant economic issues on the horizon that mean this reprieve might not last long.

Kevin Doran, chief investment officer at AJ Bell, explains: ‘The recent weakness in the pound and the rising oil price are a concern, which could quickly reverse the drop in inflation. The jump in the oil price has pushed up costs for UK consumers and businesses alike. In addition, the weak pound will be driving up input costs for many UK companies, which will ultimately filter through to UK consumers in the coming months.’

‘If inflation does increase, UK consumers will once again start to feel the pinch. Wage growth is currently only marginally ahead of inflation at 2.6 per cent and interest rates on cash savings remain rock-bottom, so rising prices will weaken the spending power of both earnings and savings.’

Good news for investors

These figures come in the wake of the Bank of England’s recent decision not to raise rates in May. The Bank initially stepped back from what was widely tipped to be the first rate rise above 0.5 per cent in more than a decade due to worse than expected economic figures in the first quarter of 2018. Some experts now believe that any rate rise is unlikely this year.

Ben Brettell, senior economist at Hargreaves Lansdown, explains: ‘Inflation falling for the third month in a row further dents any hopes of a late summer rate rise from the Bank of England.

‘The Bank is currently thought likely to put rates up in August. But it looks to me like 2018 will be another year of the ‘Goldilocks’ economy – not too hot to stoke inflation and force interest rates higher, and not too cold to induce any panic among policymakers.

‘I think we might not see a rate rise for the rest of the year. When they do rise, they’ll do so only gradually, and peak at much lower levels than in previous cycles.

‘But while savers will be disappointed, it’s pretty good news for investors. Stock markets don’t tend to like rising interest rates much, so an environment where rates rise only gradually should be supportive for the UK stock market.’

-The UK’s smallest companies are looking like good value

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