UK inflation will remain higher than the Bank of England’s 2 per cent target until at least 2015, according to a study that highlights the effect of a slowdown in global imports.
James Carrick, an economist at Legal & General Investment Management and author of the report, says the amount of goods and services that countries are importing relative to GDP has plateaued for the past six years, after rising steadily for the past few decades. Reasons for this include a rise in the amount of goods that China is creating and exporting, and a sharp fall in the country’s imports since 2005.
‘From the 1980s, total global imports as a proportion of total spending rose pretty consistently,’ Carrick says.
‘China joined the World Trade Organisation in 2001, which should have led to a surge in trade between China and the rest of the world as barriers were reduced. But China’s demand for imports has faded […] and it has become more successful and able to sell its own products.’
Carrick argues that the data suggests global trading may have peaked, which should cause higher global inflation. This is because trade boosts efficiency and competitiveness and reduces prices. ‘If you’re not importing more products you can’t keep cutting the cost,’ he says.
Indeed in the UK consumer goods inflation (with energy prices stripped out) has risen steadily since 2009 as UK imports have remained static.
According to Carrick, rising global trading has had the effect of reducing UK inflation by one percentage point from 1997 to 2007.
If global trading has peaked, Carrick now forecasts that UK inflation will be one percentage point higher each year. He predicts that Consumer Prices Inflation will be 2.6 per cent in 2013 and 2.5 per cent in 2014, higher than the Bank of England’s target.
‘Of course the bank could force inflation lower by ruling out further quantitative easing and raising interest rates, but this would push growth even lower,’ he says.
‘We think the bank will view the cost of taming inflation as too high, and continue to tolerate higher inflation.’
In contrast to Carrick’s views, economic consultancy Capital Economics predicts that CPI inflation will average 2.7 per cent in 2013 and fall to 1.7 per cent in 2014.
UK CPI inflation was 2.8 per cent in March, and Stephen Jones, chief investment officer at investment firm Kames Capital, believes inflation will stay at around or slightly above that level for a while, due to the weakness in sterling.
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, agrees, saying the weak pound means the cost of imports will rise, leading to inflation ‘persistently above the 2 per cent target’.