Inflation Sticks, but It Is Still Odds-On to Fall; ECONOMY
West Midland businesses yesterday called on the Bank of England to stick to its strategy of low interest rates and quantitative easing after the consumer price index of inflation unexpectedly stuck at 1.8 per cent in July.
The lack of movement in the consumer prices index (CPI), the Government's preferred measure of inflation, took business by surprise.
"Given the extra capacity across the economy, as well as falling food prices, we expected inflation to continue to fall," said Birmingham Chamber of Commerce and Industry's policy adviser, Katie Teasdale.
Those economists who thought CPI would fall even further below the Government's two per cent target, to 1.5 per cent in July, were yesterday still predicting big falls in the annual rate by the end of the year and a continuation of the current loose monetary policy, with base rate pegged at the current 0.5 per cent.
Yesterday's figures from the Office of National Statistics showed that retail price inflation (RPI), a broader measure that includes housing costs such as mortgage interest payments and on which many wage deals are based, came in at minus 1.4 per cent in July compared with minus 1.6 per cent in June.
That, again, confounded predictions of a sharper decline in RPI.
Sterling gained about half-a-cent against the US dollar and gilt prices fell after the strong reading caught the City by surprise. Ms Teasdale went on to warn that the United Kingdom faces the danger of growing deflationary pressures across the economy adding to the risk of falling growth.
"As CPI inflation remains under target, RPI inflation is in negative territory and we face growing deflationary pressures across the economy," she said.
"Our priority must be to return to a stable growth, low-inflation economy as soon as possible. As ever, stability remains crucial to business success."
The consensus among commentators was that monetary policy is unlikely to change. "We suspect that inflation can fall to one per cent over the next few months which suggests that the Bank of England could offer additional stimulus if the recovery proves to be more sluggish than hoped," James Knightley, an economist at ING, said.
Charles Davis, economist at the Centre for Economics and Business Research, said the figures were surprising, given that eurozone inflation fell to minus 0.7 per cent in July.
"Part of this is due to the sterling depreciation which, despite gains over the last month, is significantly weaker than a year ago," he said.
"Furthermore, there are signs of recovery in global demand which has led commodity prices to rebound. …