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Does the fall in inflation signify the start of a longer-term reduction?

Does the fall in the rate of inflation signify the start of ..

Does the fall in the rate of inflation signify the start of a longer-term reduction?

YES – Maike Currie, investment director at Fidelity International

The fallen value of the pound following the Brexit vote has been the main driver behind rising prices. But the nature of currency-driven inflation is that it tends to be short-lived and self-correcting. Sterling has been steadily rising since the start of the year, passing $1.38 for the first time since Britain’s decision to leave the EU.

Second, with our pay packets not rising as fast as prices, we’re feeling progressively poorer as each month rolls by and this inevitably means we’ll spend less. Less consumption, in time leads to weaker inflation.

Then there are longer-term economic trends that cannot be ignored. An ageing population limits the size of the global workforce, which by corollary suppresses economic activity. Rising inequality and the growing cohort of self-employed people with limited earning power, means less money to spend. Again, that means less consumption and keeps a lid on inflation over the long term.

There’s a very good chance that three per cent might be the peak for inflation.

NO –Vicky Pryce, CEBR

While the impact of sterling’s devaluation is now reducing, there is probably still inflation in the supply chain which has yet to be passed through to final prices. Indeed the percentage of firms reported to be intending to raise prices has risen. And global inflationary pressures will continue, with the cost of a barrel of Brent crude climbing above $70 last week for the first time since 2014.

Though strengthening against the dollar, the pound remains particularly weak against the euro. The small December inflation improvement owed a lot to possibly one-off downward contributions from airline fares, and a fall in prices of recreational goods such as toys and games – probably reflecting the discounting in the run up to Christmas.

So while the three per cent inflation rate may be near its peak, the impact of the 3.4 per cent increase in rail fares, pressures from increased skills shortages, and higher oil prices as the global economy continues its recent strong expansion, will tend to limit how far inflation falls in the short-to-medium term.

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