Inflation report outlook set to benefit consumers

UK shoppersWith inflation and interest rates at record low, and wages forecasted to rise, analysts anticipate a more positive environment for UK consumers, following yesterday's inflation report from the Bank of England.

The UK inflation rate may fall below 1% in the next six months, from 1.2%, according to November's inflation report.

Mark Carney, governor of the Bank of England, says it is "more likely than not" that he will have to write an open letter to the chancellor within the next half year, explaining why the inflation rate is so much lower than predicted.

With inflation not expected to return to its target of 2% until the end of the forecast period in 2017, interest rates are also likely to remain unchanged until the second half of 2015.

However, the outlook for pay growth was more optimistic, with Carney announcing that the Monetary Policy Committee expects salaries to increase by 2% by the end of next year.

Analysts have responded to this combination of results, suggesting a more positive climate for UK consumers.

Paras Anand, head of European equities at Fidelity Worldwide Investment, says: "Part of this reduction in inflation will be a welcome development for consumers who have been pinched over recent years by the squeeze on real incomes."

He adds that a lower level of inflation over the medium term and higher interest rates could provide scope for more steady economic recovery in the UK, as consumption boosts economic growth.

Anna Stupnytska, global economist at Fidelity Worldwide Investment, says: "With inflation set to stay low or even to decline further, real wages and disposable incomes should grind higher, benefitting consumers over the next few months."

However, questions around changes to interest rates remain.

Guy Foster, group head of research at Brewin Dolphin, says: "Taken in conjunction with the employment data ... the message remains very cautious."

Hermes' chief economist, Neil Williams, says Carney's mantra that rate rises will be only "gradual" leaving rates lower than historic norms fits with his expectation that the committee will do two things along the way.

"First, resist squeezing the interest rate trigger till late summer 2015, to guarantee recovery and allow inflation to drift back toward target," he asays. "And second, the bank will ultimately then try to keep the peak interest rate down by pulling on the other monetary lever: letting their quantitative easing-bought gilts run down."

Williams adds that inflation-control is becoming "yesterday's problem" and as the eurozone tensions shift from the periphery to the core countries, the committee "can sit on its hands" in terms of rate hikes well into next year.

Carney attributed the low inflation rate to a number of factors, including the sharp fall in global commodity prices and weak inflationary pressures from trading partners and the domestic economy.

The report also revealed a prediction of weaker economic growth for the UK – 2.9% in 2015 and 2.6% for the following two years.

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