Tuesday, July 17, 2012
Not much inflation in 2012
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Whisper it quietly but these were very good inflation figures. Three months ago, after disappointing numbers, Paul Tucker, now in the news for other reasons, suggested inflation would stay above 3% until well into the second half of the year. Instead, it has dropped sharply, including the fall in consumer price inflation from 2.8% in May to 2.4% in June announced today.

Retail price inflation came down from 3.1% to 2.8%. It was the lowest since December 2009, while CPI inflation was the lowest since November that year. According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between May and June came from clothing & footwear, transport and food & non-alcoholic beverages."

Where it gets very interesting is look at the consumer prices index in June and comparing it with December last year. It has increased by just 0.5%, implying that inflation is running at an annualised 1%. It has further to fall. Is a drop to 2.4% enough on its own to turn real income growth positive? Probably. Though it is still above the official figures for the growth in average earnings, nominal household incomes appear to be rising by more than earnings. So these numbers set things up for a recovery in real income growth.

Of course some will say that falling inflation is a product of weak demand and so is bad news. Mainly, however, it is good news. Energy and commodity prices ran up by too much and some people saw only high inflation on the horizon in spite of weak growth. More here.