Britain’s rate of inflation slowed by more than expected during October, official figures showed last week, although unemployment crept to a 17-year high.
The Office for National Statistics (ONS) said the consumer prices index hit 5% last month, falling from the 5.2% reported in September. The retail prices index, which is used by employers for wage negotiation, dropped from 5.6% to 5.4%.
Declines in the price of food, driven by “significant and widespread discounting” by supermarkets and good harvests, combined with falls in the cost of air fares and petrol to exert downward pressure on inflation. (article continues below)
The fall lent weight to the Bank of England’s view that inflation is close to peaking before falling back towards the official 2% target next year.
Mervyn King, the Bank’s governor, claims inflation is “more likely to be below the target than above” in both 2013 and 2014.
Richard Jeffrey, the chief investment officer at Cazenove Capital Management, says: “Inflation will fall quite rapidly next year. I’m not convinced it will hit the target rate but it is certainly going to fall sharply.”
Last week the ONS confirmed that British unemployment rose by 129,000 to hit 2.62m in the three months ending September 30, its highest level since 1994. The unemployment rate increased from 8.1% to 8.3%.
Average regular pay, which excludes bonuses, rose by 1.7% over the quarter to £436 a week, down by 0.1 percentage points on the three months to August 31.
Jeffrey says the key concern is how the trend in inflation relates to the trend in average earnings, as this affects the squeeze that is being seen in consumer spending and confidence.
“There was quite significant growth in average earnings over the initial part of the century up until around 2007 and 2008 but then the average earning person has lost all the benefits of growth in earnings to inflation,” he adds.
However, the economist predicts the constraints on spending power will ease over the course of 2012.
He says it is “quite possible” average earnings will grow more in line with inflation despite continued weakness in the wider labour market.