By Marcus Leach
Graeme Leach, Chief Economist at the Institute of Directors, has said that whilst the drop in inflation is good news, we shouldn't get too complacent about it, as the rate of decline could yet slow.
However, despite this, Mr Leach does feel that the drop in inflation, from 2.8% in May to 2.4% in June, is good news and, further to that, means the rate could be below target at the end of the year.
“The economic rollercoaster continues. Bad news on growth from the International Monetary Fund has been followed by good news on inflation from the Office for National Statistics," Leach said.
"The fall in headline inflation from 2.8 to 2.4 per cent is very welcome and suggests CPI inflation could be well below target by year end.
“Poor weather related clothing sales and heavy discounting accounted for much of the fall. But the underlying drivers were weak money supply, spare capacity and anaemic growth in earnings. These forces are likely to exert continued downward pressure on inflation well into 2013.
“But we shouldn’t be too complacent about inflation. Inflation is definitely heading downwards, but the rate of decline could slow. Brent crude oil prices have edged back up above $100 per barrel and America’s scorching summer has pushed up global corn and wheat prices sharply, with a potential knock-on effect on food prices in the UK later this year”.
Meanwhile, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said that if the rate of decline continues the squeeze felt by businesses and consumers of late will ease.
“Inflation fell in June, which is positive news for the economy. If these trends continue, the squeeze felt by businesses and consumers will ease, and improved disposable incomes will boost demand in the economy," Kern said.
"Lower global energy prices and the strong pound against the euro have contributed to these downward pressures. The rise in sterling could adversely affect competitiveness, but this is likely to be offset by increased demand as a result of lower inflation.
“There is a chance that towards the end of the year or in early 2013, inflation will temporarily fall below the 2% target. This will follow a prolonged period of above target inflation, and should not be a cause for concern for the MPC. While austerity measures are putting downward pressure on demand, there would be nothing wrong with allowing below target inflation to support consumer spending. With this in mind, we believe there is no need for further increases in quantitative easing.”
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