Tuesday, June 2, 2020

Plateauing inflation will frustrate businesses

It has been announced that the Consumer Price Index (CPI) was 2.4% in May, unchanged from April 2018, missing estimates.

Tej Parikh, Senior Economist at the Institute of Directors, said: “The plateauing of inflation – driven by higher fuel prices – is likely to frustrate households and businesses. Indeed, high oil prices are a temporary setback for the economy at a time when wider cost pressures appeared to be abating.

“Consumers would have been relieved by recent falls in inflation, but the pick-up in pump prices combined with a slowdown in wage growth – reflected in yesterday’s labour market data — remind us that the cost of living remains strained.

“Meanwhile, the increase in producer input prices largely reflects the impact of more expensive crude oil, and suggests there will yet be some pass through to consumers over the summer months, which may even lead to an increase in inflation.

“The latest inflation data is unlikely to alter the Bank of England’s likely strategy to ‘wait and see’ for more data at its meeting next week. Indeed, the MPC has tended to look through oil shocks in the past, and with employment continuing to rise, alongside the rebound in economic activity since Q1, the Bank is expected to press ahead with a rate rise in August.”

Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said: “Inflation held steady for the first time since January 2018, with the upward pressure from fuel prices in May offset by weaker outturns in several categories. That said, the marked pick-up in producer price growth does point to increased inflationary pressures further down the supply chain.

“It is possible that inflation may start to drift upwards in the coming months as the recent spike in oil prices filters through supply chains and into higher consumer prices. However, any pick-up in inflation would be relatively short-lived, with price growth likely to resume its downward path later in the year as the pressure from oil prices eases.

“With inflation unchanged and a number of other economic indicators pointing to a weakening economy, the prospect of an August rate hike is looking more remote. Indeed, the case for raising interest rates at all this year continues to look limited at best.

“With economic conditions becoming more sluggish, more needs to be done to incentivise business investment, including addressing the burden of upfront costs and taxes faced by UK business, as well as tacking longstanding issues such as the skills gap and the chronic underinvestment in the UK’s digital and physical infrastructure.”

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