UK: Deloitte Monday Briefing: At Last, Lower UK Inflation

Last Updated: 1 April 2014
Article by Ian Stewart

* The good news keeps coming in for the UK economy. Last week inflation dropped to 1.7%, the lowest level in four years, down from a peak of 5.2% in late 2011.

* Falling inflation will come as a huge relief to the Bank of England. Not only has inflation been above the Bank's 2.0% target for most of the last six years, the UK has had the unfortunate distinction of being one of the industrialised world's highest inflation nations in recent years.

* High inflation has been driven by buoyant commodity and energy prices, a weak pound and increases in indirect taxes. Today all three factors are unwinding.

* Global commodity prices have dropped by about 20% in the last three years. In 2010 UK transport costs were rising by over 10% year on year. Today they are falling.

* A stronger pound, now at its highest level since 2009, has helped push down the price of imported goods. UK holiday-makers are seeing the benefits of sterling strength in the cost of breaks to popular destinations such as the US, Turkey and South Africa.

* And a period of austerity-driven increases in indirect taxes has come to an end, removing another source of upward pressure on inflation.

* Not only has the headline rate of inflation dropped, so too, has the less erratic, "core" rate, which strips out energy and seasonal food.

* Falling rates of inflation are not just a UK phenomenon. Headline and core rates of inflation have fallen sharply in the US and the euro area in the last two years. As in the UK, currency strength against emerging market economies and weaker commodity prices have helped curb inflation in Europe and the US.

* Forecasters and central banks are fairly optimistic that an upturn in growth in developed economies can be combined with subdued inflation over the next couple of years. One reason for optimism is that inflation has a significant counter-cyclical element. Economic expansion tends to be accompanied by rising productivity and falling unit labour costs, helping push down inflation.

* There are plenty of potential risks. A tight labour market could mean that wages rebound faster than productivity, fuelling inflation. The Bank of England is alive to the dangers of excessive credit growth, a buoyant housing market or a lack of spare capacity in the economy. And while commodity prices have generally softened, many of the arguments for a long run commodity "super-cycle" – everything from the scarcity of farm land to the depletion of oil reserves – remain intact.

* The greatest unknown, though, is monetary policy itself. Central Banks have undertaken an unprecedented experiment in monetary policy in the last six years. Historians will debate the role of Quantitative Easing (QE) in staving off a depression for years to come. The long term effects of QE on the price level are just as uncertain as its efficacy over the last few years.

* Central banks' next challenge is to gradually tighten monetary policy without tipping the world back into recession. Getting the balance right between growth and inflation may yet prove almost as challenging as navigating the recession.


UK's FTSE 100 ended the week up 0.9%.

Here are some recent news stories that caught our eye as reflecting key economic themes:


* The Bank of England and the People's Bank of China will sign an agreement to make London the first non-Asian area in which investors will be able to clear and settle Chinese renminbi trades

* Rating agency S&P warned that an intensification of the crisis in Russia could cause the Russian economic growth to slow to just 0.6% in 2014

* The Finnish government started talks to temper austerity in the country in response to economic turmoil in nearby Russia

* The International Monetary Fund agreed a bailout deal for Ukraine, offering between $14bn and $18bn to help meet debt repayments

* British food and drink exports rose 5% in 2013, with exports of Scottish salmon to China almost doubling from £23m to £50m

* The European Commission carried out raids on exhaust system manufacturers in "several" countries as part of a far-reaching probe into cartels in the car component industry

* Italy's new government opened an eBay auction to sell hundreds of civil service cars, including BMWs, Alfa Romeos, Lancias and Maseratis

* Portugal's benchmark 10-year borrowing costs fell below 4%, having peaked at 17.4% in 2012, and well below Portugal's average 5.5% since joining the euro

* Turkey's telecommunications authority blocked access to YouTube, continuing a crackdown on sites that criticised Prime Minister Recep Erdogan

* China Petroleum & Chemical Corp, the country's top refining company, said it would cut capital expenditure to 4.2% in 2014, with PetroChina cutting capex to 7.0%

* US consumer confidence rose to a 6-year high in March, with consumer more upbeat about job prospects and the overall economy

* Record numbers of UK housebuyers opted for fixed-rate mortgage deals in February, according to figures from the Mortgage Advice Bureau

* Business travel in the US was worth $384bn in 2012, comprising around 3% of the economy's GDP, according to data from the Global Business Travel Association

* More than 21,000 new jobs could be created in beauty salons across the UK in 2014 according to research by Salon Services, due partly to a boom in male grooming services such as manicures and tanning

* The burger is close to overtaking the baguette as France's staple sandwich according to market research firm Gira Conseil, as cash-strapped French consumers increasingly turn to fast food – bread winner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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