On course for prolonged period of below target inflation

Martin Beck, senior economic advisor to the EY ITEM Club comments:

“The October outturn of -0.1% was in line with expectations. The unusual seasonal pattern in clothing prices continued, with September’s weakness being followed by a rebound in October. But this merely offset the downward pressures on inflation from the education component, with the impact of the 2012 increase in the cap on university tuition fees continuing to dissipate.

“October’s reading is likely to mark the low point for inflation, with the base effects associated with last year’s collapse in the oil price set to kick in from next month’s data. Indeed, these base effects are so strong that we could easily see a reading in the region of 0.5-0.6% as soon as December.

“However, aside from these base effects there is little reason to expect any significant build-up of inflationary pressures. Today’s producer prices data reported a lack of inflationary pressures in the supply chain, while commodity prices are extremely weak, the effects of the strong pound are yet to fully feed through and core inflationary pressures remain subdued. This suggests that we are on course for a prolonged period of below target inflation.

“In this context, it is no surprise that the MPC has become increasingly dovish of late. We are unlikely to see CPI inflation get back to 1% until the spring. We see this as an important landmark, with the MPC unlikely to actively consider raising interest rates until inflation has regained this level and the Governor has stopped having to write open letters to explain the persistent undershoots of the target. But even beyond that we think it will take some time for inflation to move back up towards the 2% target. Against such a benign backdrop, we expect the MPC to keep its powder dry until at least the second half of 2016.”