Inflation would at last appear to have embarked on a downward path, which could signal an easing of the income squeeze that is currently affecting UK households (See XpertHR's February 2012 economic commentary for more on this topic). But how likely is it that the story of 2012 might be a straightforward one of inflation continuing to fall?
Tide begins to turn on high inflation
Latest inflation data suggest that the tide might have begun to turn, although inflation remains elevated:
- Consumer prices index (CPI) inflation fell back to 4.2% in December 2011 (down 0.6 percentage points from 4.8% in November).
- Retail prices index (RPI) inflation dropped to 4.8% in December 2011, a fall of 0.4 percentage points from the previous month's figure (5.2%).
- The EEF expects CPI inflation to hit its 2% target rate in August 2012.
- The Ernst & Young ITEM Club says "falling inflation should provide a platform for a consumer recovery" in the second half of 2012. It expects CPI to average 2.3% in 2012, slowing further to 1.9% in 2013.
However, the story of inflation in 2012 may not prove this straightforward. Falling inflation could cause problems of its own. And it is also possible that a spike in oil prices could apply new upward pressure to inflation. The Guardian sums up this situation:[I]it may be that by the end of 2012, it's deflation, not inflation we'll be worrying about - though if Iran carries out its threat to close the strait of Hormuz, and choke off oil supplies to the west, all bets are off.
The Economist notes
that "some 20% of world oil production passes" through the strait of
Hormuz, and that "supply disruptions of that magnitude in the past were
associated with oil price increases of between 25% and 70% - and with
American recessions."
See also:
See also:
- XpertHR economic commentary February 2012: Squeezed XpertHR's February 2012 economic commentary - published to XpertHR's Pay Intelligence blog - examines current threats to UK economic recovery, including the ongoing income squeeze.
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