Inflation is falling back rapidly.The two headline measures of inflation (CPI and RPI) are currently significantly below recent peak levels.
But whether this ultimately proves to be good news or bad news for the UK economy depends on how far and how fast inflation falls from this point on.
'The silent killer of growth'
Falling inflation is good news for recovery prospects, argues Larry Elliott:
High inflation has been the silent killer of growth for the past 18 months. While all the attention has been on the government's austerity measures, it has been the less obvious, but still very real, squeeze on consumer incomes caused by rising prices that has put the brakes on the economy.Elliott notes that "provided wages do not fall in tandem with prices, consumers will see their money go a bit further." This could help slowly to boost demand. If this happens, "by the second half of 2013, rising real incomes should provide some support for the economy."
Inflation outlook: Deflation fears return?
Inflation looks set to continue to fall (subscription required) over the remainder of 2012.
But while falling inflation is good news for now, the possibility remains that it could fall too far.
As noted back in February, "it may be that by the end of 2012, it's deflation, not inflation we'll be worrying about."
- XpertHR's July 2012 economic commentary explains why deflation is a matter of serious concern.
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