The gap between pay awards and inflation would appear to be growing ever wider as 2011 progresses. Latest inflation figures - published by the Office for National Statistics (ONS) this morning - reveal the following:- Retail prices index (RPI) inflation accelerated to 5.6% in September 2011, up 0.4 percentage points on the rate recorded one month previously (5.2%). RPI therefore remains significantly higher (by a factor of 3.6 percentage points) than the headline pay award as measured by XpertHR (which is worth 2% over the three months to 31 August 2011). ONS says that today's RPI reading is "the highest RPI annual inflation rate for over 20 years (it was last higher in June 1991 when it stood at 5.8 per cent)."
- Consumer price index (CPI) inflation continues to rise further above the 2% target rate, hitting a record high of 5.2% in September 2011 (up from 4.5% in August). Today's CPI rate equals the record high set in September 2008. ONS notes that: "By far the largest upward pressure to the change in CPI annual inflation between August and September came from increases in gas and electricity charges."
Bank of England Governor Mervyn King expects inflation to decline rapidly in the near future.
In a public letter to George Osborne earlier this month, King (quite correctly, as it turns out) stated that "inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices."
Looking further ahead, the picture changes. King expects inflation to "fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists." King believes that CPI is likely to "undershoot the 2% target in the medium term."
If King's assessment is correct, then the expected boost to inflation from the Bank of England's recent extension of its programme of quantitative easing would therefore serve to help achieve the Government's 2% target rate for CPI inflation in the medium term.
However, other factors could yet serve to keep inflation high. In a very interesting Twitter discussion with me this morning, Oil & Gas Middle East Magazine Assistant Editor Patrick Osgood argued that it is "impossible when to call peak inflation because we are at the mercy of events abroad." Osgood believes that utility prices - which ONS says are the key factor driving today's joint record high in CPI - could make all the difference. Osgood says:
"It's highly likely that inflation will fall a lot next year." This is according to Chris Dillow, writing on investorschronicle.co.uk. In light of today's shock rises in inflation, Dillow says:
He notes that public expectations of higher inflation and the extension of quantitative easing could exert some influence on inflation.
But, Dillow says, "most economists think the net effect of forces such as these will be small, and that inflation will therefore fall sharply because of the maths. The consensus forecast is for CPI inflation to fall to 2.25 in the fourth quarter of next year. [...] In this sense, basing your investment decisions upon today's inflation rate is rather like driving by looking only in the rear-view mirror. It's not to be advised."
UPDATE 2 (Tuesday 18 October 2011): The CBI also expects inflation to fall back significantly over the coming months. CBI Chief Economic Advisor Ian McCafferty responded to today's inflation data release as follows:
In a public letter to George Osborne earlier this month, King (quite correctly, as it turns out) stated that "inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices."
Looking further ahead, the picture changes. King expects inflation to "fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists." King believes that CPI is likely to "undershoot the 2% target in the medium term."
If King's assessment is correct, then the expected boost to inflation from the Bank of England's recent extension of its programme of quantitative easing would therefore serve to help achieve the Government's 2% target rate for CPI inflation in the medium term.
However, other factors could yet serve to keep inflation high. In a very interesting Twitter discussion with me this morning, Oil & Gas Middle East Magazine Assistant Editor Patrick Osgood argued that it is "impossible when to call peak inflation because we are at the mercy of events abroad." Osgood believes that utility prices - which ONS says are the key factor driving today's joint record high in CPI - could make all the difference. Osgood says:
big factor is < utility prices. Drive inflation, take money out of consumer economy. Govt needs to and can produce finger here.UPDATE 1 (Tuesday 18 October 2011):
"It's highly likely that inflation will fall a lot next year." This is according to Chris Dillow, writing on investorschronicle.co.uk. In light of today's shock rises in inflation, Dillow says:
So, do we have an inflation problem? No. These figures tell us that we have had an inflation problem. It's highly likely that inflation will fall a lot next year. Basic maths tells us as much.Dillow notes that food price inflation, utility inflation and petrol price inflation are all expected to moderate over the coming months, and that the January 2011 VAT hike will fall out of the inflation data come January 2012.
He notes that public expectations of higher inflation and the extension of quantitative easing could exert some influence on inflation.
But, Dillow says, "most economists think the net effect of forces such as these will be small, and that inflation will therefore fall sharply because of the maths. The consensus forecast is for CPI inflation to fall to 2.25 in the fourth quarter of next year. [...] In this sense, basing your investment decisions upon today's inflation rate is rather like driving by looking only in the rear-view mirror. It's not to be advised."
UPDATE 2 (Tuesday 18 October 2011): The CBI also expects inflation to fall back significantly over the coming months. CBI Chief Economic Advisor Ian McCafferty responded to today's inflation data release as follows:
We hope that this high rate of inflation will be short-lived. We expect inflation to ease back significantly through 2012 as the upward pressure exerted by this year's VAT rise and commodity price increases fades away.UPDATE 3 (Wednesday 19 October 2011): Mervyn King has reaffirmed his view that inflation is now at - or near to - its peak rate. In a speech to the Institute of Directors (IoD) in Liverpool last night (18 October 2011), King said:
[Inflation] is likely to be at, or close to, the peak, and we expect inflation now to start to fall back, as it did in the months following the peak in inflation in September 2008. [...]So it is the outlook for inflation, rather than its current rate, which explains the MPC's decision to resume asset purchases.The BBC's Stephanie Flanders notes that this view is shared by many analysts:
The city economists are again betting that inflation will fall sharply. Both they and the Bank of England expect September to be the peak. The average prediction for inflation in 2012 is now 2.5%, less than half of the latest figure. Unfortunately, they expect inflation to fall for the same reason it fell after 2008 - because of weakening demand in the UK and broader global economy.
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