The Consumer Price Index (CPI) rose by 0.1% in the year to November, compared with a 0.1% fall in the year to October. This is the first time inflation has been positive since July.
The largest upward contribution to the change in the CPI 12-month rate came from the transport component with petrol prices decreasing by a smaller amount between October and November this year than the same two months a year earlier. Alcoholic beverages and tobacco, and miscellaneous goods and services also made an upward contribution to the change in the CPI 12-month rate. Clothing and footwear made a downward contribution.
Despite the uptick in the CPI index this month, inflationary pressures in the economy are extremely subdued. Core inflation which strips out food and fuel prices edged up slightly to 1.2% in November, but remains very low. ‘All Services’ inflation has not yet made a concerted recovery remaining broadly in line with its average for 2015 at 2.4%, and goods inflation is entrenched at -1.9%.
Furthermore the uptick in the CPI index this month was partly driven by an upward contribution from the petrol price. In December the price for Brent Crude oil fell to a seven-year low at below $40 a barrel. Some of the major UK supermarkets have already begun passing the savings onto consumers by cutting the petrol price below £1 a litre, the lowest price level, excluding special promotions, since 2009. This will likely place a downward pressure on the CPI index next month.
Inflation is expected to remain near zero for the next few months as deflation in the food and fuel categories continues to depress price rises. A meaningful uptick in inflation is not expected to emerge until the turn of the year when the large oil price declines drop out of the comparison, though the CPI 12-month rate is forecast to remain below 1% for most of 2016 and below the Bank of England’s 2% target until the beginning of 2018.
Given the benign inflation profile the first rise in Bank Rate is not expected to take place until 2016q3. In the meantime with wage growth on an upward path, the low inflationary environment will continue to provide a boost to household spending power and support healthy consumer spending growth. We forecast consumer spending to grow by 3.0% this year and 2.8% in 2016.