The annual rate of consumer price inflation (CPI) fell to 1.2% in September, a 0.3% drop from the previous month and the lowest rate since September 2009. It was also the second-lowest rate of price increases seen in a decade. Core inflation, which strips out volatile energy and food, fell to 1.5%, a level last seen in April 2009.
This week’s labour market data were also encouraging. The unemployment rate declined to a near-six-year low of 6% in August. Employment edged up to a record high of 30.8 million. But annual growth in earnings remains low, at 0.8%.
What the commentators said
The Bank of England governor, Mark Carney, hasn’t yet had to write to the chancellor to explain why inflation has missed the Bank of England’s 2% target by more than 1%. But it might not be long now, said Nils Pratley in The Guardian.
Oil has fallen by a quarter in a few months, affecting everything from airline fares to households’ energy costs. The supermarkets are engaged in a price war, keeping food cheap, and the strong pound has tempered inflation by lowering import prices.
Throw in wages rising at the lowest pace on record, and “it’s hard to see why inflation should do anything other than fall further in the coming months”, agreed Markit’s Chris Williamson.
Meanwhile, the details of the employment data are encouraging, said Capital Economics. The pace of hiring has slowed; the rise in employment in the three months to August is the slowest increase since May 2013.
But with GDP expanding at a healthy clip, this suggests that output per worker, or productivity, “is finally beginning to recover”. That in turn points to a “substantial acceleration” in the rate of pay increases.
A rise in real wages should give the recovery enough momentum to shrug off the weakening eurozone and the onset of higher interest rates.
On the subject of rate hikes, the absence of inflationary pressure means it is “highly likely” that the Bank of England will delay its first move until mid-2015, according to Howard Archer of IHS Global Insight.
Until this week, markets had pencilled in a 0.25% hike by April 2015. That would be a mistake, said Allister Heath in The Daily Telegraph. Subdued inflation is not a reason to delay the advent of dearer money. The best guide to demand is nominal GDP, which is expanding strongly. Rates are too low “and should go up immediately”.