- Samuel Tombs of Capital Economics
Earlier this week the Office For National Statistics said the rate of consumer prices decelerated to 1.7% last month, hitting the lowest since November 2009 and slowing from 1.9% a month earlier. The inflation hovered below the official target of 2% for the second consecutive month, supporting the case the central bank will stick to its pledge to keep borrowing costs at the current level. At the same time, weak inflation can help to eliminate the remaining slack in the economy, as according to analysts' forecasts there is just 0.9% of spare capacity.
It seems that wages are finally on course to outpace inflation for the first time since the beginning of the global finance crisis. A decline in petrol prices and a significant appreciation of the Sterling helped to keep a lid on consumer prices, narrowing the gap between wages and consumer price inflation. Even though price growth still outpaces wage growth, that advanced 1.1% in the final quarter of 2013, economists believe the overall inflation will continue decelerating as earnings rise. Moreover, weaker inflation eases the pressure on the central bank to begin raising interest rates. According to the Office for Budget Responsibility, real wage growth will pick up this year, even though the forecast for nominal earnings growth was revised to the downside.
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