Retail prices index (RPI) inflation - the most important inflation measure for pay setters - remains stuck in negative territory but is showing some signs of improvement (PDF format, 202K) (external website), according to latest official data published today. Indeed, it now seems possible that RPI could accelerate rapidly in the next few months.
Today's latest inflation data show that:
- RPI inflation ran at -1.3% in August 2009. This was up 0.1 percentage point on the figure recorded one month previously (-1.4% in July 2009).
- Consumer prices index (CPI) inflation - the Government's preferred measure - continues to undershoot the Government's 2% target rate, running at 1.6% in August 2009 (down 0.2 percentage points from 1.8% in July 2009).
Many economic commentators believe that RPI is set to return to positive territory over the coming months. The British Chambers of Commerce, for example, says in its latest economic forecast (PDF format, 139.3K) (external website) that:
Deflation on the RPI measure is set to deepen in the second half of 2009. But this will be a temporary phenomenon only. In 2010, annual RPI inflation is expected to be again positive.
But while there is something approaching consensus that RPI will rise, what is less certain is just how fast it will rise.
The latest round-up of inflation forecasts from pay specialists at IRS concludes that RPI is set to return to positive territory in the first quarter of next year, but also notes that a mix of upward and downward pressures look set to affect RPI in 2010 (subscription required). According to IRS:
Most forecasters expect the spare capacity in the economy to continue to exert downward pressure on inflation this year, with the VAT increase planned for January 2010 and higher oil prices identified as possible sources of upward pressure in 2010.
These possible sources of upward pressure on inflation are the ones to watch for 2010, as they could have a potentially severe impact on recovery prospects not just for the UK, but for the global economy.
US economist Nouriel Roubini argues that global economic recovery is by no means guaranteed (external website), and that "there is a big risk of a double-dip recession" in which recovery is thwarted by a relapse back into recession. According to Roubini, one "reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand."
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