UK economy in a sweet spot

published 14 November 2013

The annual rate of consumer price inflation (CPI) fell unexpectedly quickly last month. It slid to a 13-month low of 2.2% from 2.7% in September, the fastest drop in 18 months. Lower petrol prices and slower rises in university fees largely explain the fall.

However, CPI remains above the Bank of England's 2% target, where it has been since late 2009. Underlying, or core, inflation (CPI without volatile energy and food prices) fell to a four-year low of 1.7%.

Unemployment has fallen to 7.6% of the workforce, the lowest since May 2009. The Bank of England now expects it to reach 7%, in the third quarter of 2014, a year earlier than in its previous forecast.

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Once this milestone is reached, the Bank is expected to consider raising interest rates. But average earnings, including bonuses, are climbing at an annual rate of just 0.8%.

What the commentators said

Now, however, said Ian King in The Times, it seems the erosion in household incomes since the downturn "is stopping companies imposing price rises on consumers in various goods and services".

There is also a good chance of inflation staying subdued in the near future. Prices at the factory gate, a gauge of price pressures in the pipeline, are rising at an annual rate of just 0.8%.

There will be energy price rises over the next few months, but these aren't crucial: the Bank reckons they adjust 0.15% to the inflation outlook. Households spend less than 5% of their money on electricity and gas.

Meanwhile, as Capital Economics pointed out, it may take longer than expected for earnings to rise and thus raise inflation: "there is more slack in the labour market than the unemployment rate suggests".

Underemployment, where people are in work but want to work more, reached a record earlier this year. For now, at least, concluded Elliot, the economy is in a "sweet spot" with price pressures subdued yet growth robust.