More good news for the Chancellor and Governor of the Bank of England this week as the downward trend in inflation continued. November’s Consumer Price Index (CPI) grew by 2.1% in the year to November, down from 2.2% in October – just 0.1% off target.
The slow-down in inflation came from two main sources – food and utilities, notably gas. With unemployment down to 7.4% both Mr Osborne and Mr Carney can look forward to Christmas 2013. However, inflation is still inflation and a £100.00 shopping basket in November 2012 would today cost £102.10. With annual earnings growth also at 2.1%, the average UK household is no better off in real terms, and still considerably worse off today than in 2008. Indeed, between 2008 and 2013 inflation has consistently out stripped earnings. When benefit caps are factored in, it is clear that the inequality gap will accelerate again, after closing somewhat during the recession. Interest rate expectations remain neutral given the contradictory evidence of falling inflation and unemployment. However, when house prices are included the picture looks less rosy for 2014, with most analysts expecting that this is the end of the downward trend in inflation. The October house price index put average house price inflation for the year at 5.5%, with a number of regions nearer to 10%, and prices in London rising by 12%! This means that Bank of England’s forward guidance will shift attention back to the labour market, and further falls in unemployment towards 7% will hasten the arrival of higher rates, as will sustained house price inflation – which are certainly expected by 2015. My New Year prediction is for rates to rise by the 3rd quarter of 2014 as the housing market gets out of control, unemployment continues to fall and consumer confidence returns.