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Inflationary pressures ease as commodity prices fall back

Date: 20th January 2014

Inflationary pressures ease as commodity prices fall back

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK inflation data and the falling commodity prices.

The main points to note are:

  • CPI inflation fell to the 2% target in December 2103 whilst producer output inflation was 1.0% and producer input prices were 1.2% lower in December 2013 than a year earlier.
  • Even though CPI inflation has fallen, it is still higher than the growth in pay, thus continuing the squeeze on real incomes. But as the economy recovers, it can be expected that real incomes will resume growing.
  • Falling commodity prices, helped by the firmer pound, have contributed to the weakening inflationary pressures.
  • The IMF expects commodity prices to weaken in 2014 and into the medium term (to 2019), as production comfortably accommodates the continued growth in demand. Specifically, the IMF is optimistic that oil prices will ease steadily throughout the period. The IMF's position does not seem unreasonable, given the improvements in supply (not least from US "shale oil") and the relatively modest expected growth in demand.
  • But oil prices are notoriously difficult to forecast, depending as they do on technological, economic and political developments. And even for 2014 forecasters are divided as to whether prices will weaken or strengthen. The projections by the International Energy Agency (IEA) up to 2035 must be especially vulnerable to large forecasting errors.
Ruth Lea said, "The latest news on weakening UK inflationary pressures is wholly to be welcomed. Assuming that earnings growth will pick up as the economy continues to recover, an end to the squeeze on real incomes becomes perfectly feasible. The IMF's commodity prices forecasts, including crude oil, are optimistic. But even if they are only half right, commodity prices should continue to weaken, which can only help to ease inflationary pressures further."

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

David Marshall, Director of Communications
020 7012 2432, 07502 285 835
davidmarshall@arbuthnot.co.uk

Pelham Bell Pottinger:

Dan de Belder
020 7337 1548
ddebelder@bell-pottinger.co.uk
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