UK inflation dropped in August, Barclays sees upside risks - UPDATE

By Michael Millar

Date: Tuesday 18 Sep 2012

Inflation continued its downward trend in August after an unexpected blip saw it rise in July.

The Consumer Prices Index (CPI) measure of inflation dropped to 2.5%, down from 2.6% in July, helped by falls in the price of clothing and footwear, furniture and household equipment, and domestic gas.

The consensus estimate had been for a rise of 2.5%.

Samuel Tombs, UK Economist at Capital Economics said July inflation had been boosted by high street sales finishing earlier than usual and a sharp Olympics-related rise in air fares inflation.

This meant a drop back in August always looked likely, he said.

Tombs added that the recent increase in oil prices meant inflation was falling at a slower pace than seemed likely a few months ago.

Inflation has fallen every month since October 2011, except for July.

Dr Howard Archer, Chief UK Economist at IHS, said a combination of oil prices, utility bill hikes, and US drought pushing up grain prices, could mean inflation remained sticky in the near term and hover around 2.5%.

This would weigh on consumers' spending power and, in turn, the recovery, with average wages only going up by 1.4% in July, he said.

The "core" measure of prices, which strips out the more volatile components like food, energy, and alcohol, increased at a 2.1% year-on-year clip, also as forecast by economists.

The largest downward pressures behind the change in the CPI rate came from furniture, household equipment & maintenance, housing & household services (particularly domestic gas) and clothing and footwear.

These were partially offset by an upward pressure from transport, particularly motor fuels, according to the Office for National Statistics.

The wider measure of inflation, the Retail Prices Index (RPI), stood at 2.9% in August 2012, down from 3.2% in July.

This was slightly higher than the consensus estimate of 3.1%.

The largest downward pressures came from household goods, clothing & footwear and food.

The only significant upward pressure came from fares & other travel costs.

Lastly, and on a more pessimistic note, economists at Barclays had this to say: "we expect inflationary pressures to build again from October, as the rebound in oil prices during Q3 works its way through the production chain, utility firms raise domestic energy prices and student tuition fee increases take effect.

"As a result, we expect inflation to end the year at about 2.5%. We also expect inflation to remain elevated in the medium term as firms resist pressure on margins from low productivity, and we see upside risks to inflation in first half 2013 from increases in food commodity prices."

« Go back to news channel

Email this article to a friend

or share it with one of these popular networks:

• DIGG
• FACEBOOK
• STUMBLEUPON
• MIXX
• YAHOO BUZZ
• DELICIOUS
• REDDIT
• NEWSVINE