By Marcus Leach
Despite the unexpected rise in the UK inflation rate, the downward trend we have seen in recent months is likely to continue, at least in the eyes of David Kern, Chief Economist at the British Chambers of Commerce (BCC).
The National Office for Statistics's (ONS) official data, released today (Tuesday) revealed a 2.6% increase, despite many analysts expecting it to continue dropping, as we have seen in the past four months.
Despite an increase in air fare costs, the main reason for the rise, David Kern is not overly concerned, and believes the downward trend will soon continue.
“The inflation figures for July recorded an unexpected rise. Despite this setback, the downward trend in inflation seen in recent months is likely to continue," he said.
"There is a realistic chance that inflation will be down to 2% by the end of the year, and will fall slightly below this target during 2013. However, the inflation figures for July show that there is no room for complacency. Recent increases in world food prices because of the drought in the US provide a reminder that there are still upward pressures.
“Since inflation has been above the 2% target for a prolonged period, a temporary fall below this target should not be a cause for concern. If inflation does fall, the economy would benefit since the squeeze on businesses and consumers would support demand in the economy.
"With this in mind, the Bank of England should not use additional Quantitative Easing, which concentrates solely on buying gilts, to limit temporary falls in inflation.”
Kern is not the only one who believes that the rise is going to be temporary, Graeme Leach, Chief Economist at the Institute of Directors, also believes that the downward path will continue over the coming months.
“The latest rise in CPI inflation to 2.6 per cent in July should only be a temporary hiccup in an otherwise downward path over the coming months," Leach said.
"The 0.1 per cent monthly increase was disappointing, but small, and needs to be seen in context. Firstly, there was always likely to be a small bounce back in clothing inflation in July, after wet weather forced heavy discounting by retailers in June.
"Secondly, the CPI index rose by 0.6 per cent in August last year, and so in the absence of such an increase this year, headline inflation should fall back sharply next month, although there are concerns about food and petrol prices accelerating. But the big drivers of inflation remain very weak, with the money supply and wage growth providing strong downward pressure.”
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