Experian expects CPI inflation to remain near zero for the next couple of months despite uptick in December

The Consumer Price Index (CPI) rose to an 11-month high of 0.2% in the year to December, compared with a 0.1% increase in the year to November. This is the first time CPI has been positive for two consecutive months since January 2015.

The only substantial upward contribution to the change in the CPI 12-month rate came from transport. Prices increased by 1.8% between November and December last year, driven principally by a 46% seasonal increase in air fares. This compared to a 0.2% decrease in transport prices between November and December 2014 when air fares rose by a more modest 19%.

While cost pressures remain largely absent, there are signs that inflation in the services sector may be bottoming out. The ‘all services’ component of the CPI rose to 2.9% in December from 2.4% in November, the highest it has been since September 2013. Similarly ‘core inflation’, which strips out food and fuel increased to 1.4% in December from 1.2% in November the strongest it has been since October 2014.

Looking ahead, the CPI is expected to remain near zero for the next couple of months. Air fair prices are highly variable and the seasonal increase in prices in December is unlikely to be sustained. A further lurch down in oil prices in January, with Brent Crude falling below $28 a barrel for the first time since 2003 will also continue to supress the CPI. Oil price fundamentals are set to remain weak as oversupply to the global oil market is exacerbated further by an increase in exports from Iran following the abolition of trade sanctions. That said there may be some offset due to the recent decline in sterling against the US dollar, which may lead to some upward pressure on US dollar-priced commodities.

Given the benign inflation outlook we maintain our view that the first rise in Bank Rate will not take place until 2016q3. In the meantime the low inflationary environment and on-going wage increases are expected to support strong consumer spending growth of 2.8% this year.

Experian Economics has been named joint 3rd most accurate economic forecasting house for the UK in 2015 by The Sunday Times. Our economists are ideally placed to continue helping organisations identify the economic trends that will shape their business strategy in the months and years to come. Visit our website for more economic updates and forecasts.