Economy: Increase in CPI rate of inflation ‘likely to be a blip’

PRESS ASSOCIATION Photo. Picture date: Friday January 17, 2014. Photo credit should read: Dominic Lipinski/PA Wire PRESS ASSOCIATION Photo. Picture date: Friday January 17, 2014. Photo credit should read: Dominic Lipinski/PA Wire

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Tuesday, May 20, 2014
11:32 AM

Inflation rose for the first time in 10 months in April, official figures showed today, stalling hopes for a pick-up in real terms wages.

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The Consumer Prices Index (CPI) measure of inflation ticked up to 1.8% after hitting a four-year low of 1.6% the month before, the Office for National Statistics (ONS) said.

Latest figures show annual wage increases were stuck at 1.7% meaning a hoped-for sustained period of pay rising faster than the cost of living has yet to materialise.

Today’s widely-expected inflation figure still means it has been at or below the Bank of England’s 2% target for five months in succession, with the rate expected to remain low for some time, but it ends a period over which CPI fell for six straight months.

The apparent hiccup in the trend of falling inflation comes after the previous month’s figure was hailed as “welcome news for families” by Chancellor George Osborne.

Earnings have not consistently been improving at a higher rate than the cost of living since 2008 but appear to have caught up in recent months.

A hoped-for acceleration in real-term wages would provide a boost for the Coalition amid Labour claims that the recovery has yet to improve the lives of ordinary voters. But the new figures suggest that this remains stuck in the starting blocks.

CPI was driven higher by air and sea fares due to the timing of Easter, which fell in April this year, as well as petrol prices which were flat compared to a 2.1p per litre month-on-month fall in 2013.

A recovery in retail prices and sales for women’s clothing and accessories also had an upward impact on inflation.

Food and non-alcoholic beverages fell by 0.5% month-on-month though there was no indication as to whether this was a result of the much-heralded supermarket price war.

Within this, vegetables fell 2.3% between March and April due to a better growing season, while the price of fish dropped 3.4%.

Experts at Capital Economics said the CPI rise looked likely to be a “blip” almost entirely reflecting the timing of Easter.

Capital’s UK economist Samuel Tombs said the trend should continue to be down over the rest of 2014 as commodity prices stabilise, import prices fall and supermarkets and other retailers step up competition.

He said: “We continue to think that CPI inflation should ease to as low as 1% by the end of this year and remain comfortably below the 2% target in 2015.”

But James Knightley, of ING Bank, said there were tentative signs of wages picking up, with momentum building over the coming year and good indications of hiring intentions.

“In an environment of firm economic growth and strengthening corporate pricing power we feel that CPI will gradually grind higher over coming quarters,” he said.

Ben Brettell, economics editor at stockbrokers Hargreaves Lansdown, said: “Inflation at 1.8% is higher than last week’s wage growth figure of 1.7%, but I’m not sure this adds much to the so-called ‘cost of living crisis’ debate. It is clear that there is a trend for price inflation to be subdued.

“Wage inflation is harder to forecast, but it looks like we could see a period of modest real wage growth with wages increasing marginally faster than prices over the next year or so.”

The Bank of England said last week that it expected inflation to remain at or below its 2% target for the next few years, easing pressure on it to hike interest rates.

It has been helped by a 10% rise in the value of sterling since last year, keeping the cost of imported goods down.

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