Inflation fall masks likely winter rise due to energy and fuel prices

Inflation fell slightly in August, according to official figures released today by the Office for National Statistics (ONS).

The consumer prices index (CPI) measure of inflation fell to 2.5 per cent from 2.6 per cent in July. Meanwhile, the retail prices index (RPI) fell from 3.2 per cent to 2.9 per cent.

The slight fall was widely anticipated by analysts after the surprising rise in July when CPI increased to 2.6 per cent from 2.4 per cent. The rise in utility and clothing prices from this time last year led to the minor drop in inflation.

However, a combination of rising food prices due to the droughts in the United States, expected energy price rises this autumn and higher petrol prices mean that inflation could prove sticky over the winter.

The Bank of England will be pleased at the slight fall but will also be preparing itself for a hike in inflation over the winter, taking it further from its target of two per cent.

Howard Archer, Chief UK and European Economist at IHS Global described the figures as "Modestly good news for consumers and the Bank of England."

However, the Bank of England consistently said that between the peak of inflation in September 2011 until the spring of 2012 that inflation would fall to or below the two per cent target in the second half of 2012 and in 2013.

That now looks unlikely to happen and with wage increases still muted, consumers can expect to see the squeeze on disposable income continue. This contradicts a report published by the Centre for Economic and Business Research (CEBR) yesterday that predicts UK households will see a rise in income levels in 2013 for the first time for five years.

Colin Edwards, economist at the Centre for Economics and Business Research (Cebr), said: "On the whole, today's figures represent marginally better news for UK consumers. The more consumers are able to buy with their incomes, the higher their living standards are likely to be. However, looking forward, it seems unlikely that consumers will be provided with similar respite from further falls in inflation."

A fall in the costs of furniture and household goods and services was enough to offset the upward inflationary pressure from rising fuel prices.

Real wages are still falling by an average of one per cent as average earnings have increased by 1.5 per cent in the last 12 months.

However, the ONS says that inflation is likely to rise in future months because of expected hikes in utility bills, oil and food prices over the next few months.

Some analysts believe that although inflation has been falling, it has been so high for so long, in comparison to salary increases, that the perception is that it is actually higher than it is.

William Hunter, founder of Hunter Wealth Management said: "In the Bank of England's latest Inflation Attitudes survey, most people thought inflation was at 4% or more, and it's this perception that is contributing to holding back the economy. Perception is as important as prices.”

Mr Archer added: “Consumer price inflation should trend lower over the medium term although it may well be sticky in the near term and hover around 2.5%.

“The stickier that inflation is over the coming months, obviously the more it will weigh down on growth prospects by maintaining a squeeze on consumers’ purchasing power.”

Looking ahead, Mr Archer believes the current inflation environment makes it more likely that the Bank of England will add to its asset purchase programme.

“The easing back in consumer price inflation in August supports belief that the Bank of England will enact further stimulus to help the economy in the fourth quarter,” he said.

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