Rate of inflation expected to slow but fall in cost of living to be short-lived

Published on 17/09/2012 14:20

THE RATE of inflation is expected to slow in figures released tomorrow but economists warn any fall in the cost of living is likely to be short-lived.

The consumer price index (CPI), which hit a 31-month low in June before unexpectedly rising to 2.6% in July, is likely to ease back to 2.5% or less in figures for August published by the Office for National Statistics.

But the squeeze on consumers is expected to return as droughts in the United States are likely to mean higher food prices while petrol pump prices are creeping higher and more energy price hikes are in the pipeline this autumn. Higher university tuition fees will also add to inflation next month.

Victoria Clarke, economist at brokers Investec, has forecast a rate of inflation of 2.3% tomorrow but warned CPI will begin rising early next year.

The forecasts will trouble the Bank of England, which is tasked with keeping inflation as close to the Government’s 2% target as possible, after it previously said the rate would fall throughout 2012 and into 2013.

The Bank stepped up its quantitative easing emergency support programme in July, from £325 billion to £375 billion, which has drawn criticism by pension campaigners due to its adverse impact on inflation.

The August rate is expected to drop as high airfare increases in July will be reversed and increases in clothing prices also moderate from the previous month.

There will also be some downward pressure coming from gas and electricity, with prices expected to be more or less flat compared to the 1.7% and 1% respective price rises recorded between July and August last year.

Howard Archer, chief UK and European economist at IHS Global Insight, said CPI is unlikely to dip below 2% until well into 2013.

He said: “Future oil and food price developments will have a key role to play in just how far and how quickly consumer price inflation comes down over the coming months.”

The pressure faced by households was underlined by jobs market data released last week as average earnings growth in the quarter to July slowed to 1.5%, far behind the rate of inflation.