Inflation is easing but for how long?

Kamal Ahmed
Economics editor
@bbckamalon Twitter

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With wage growth strengthening and the rate of inflation falling more rapidly than expected, our incomes are finally starting to rise in real terms.

It is all relative, of course.

After a decade of income stagnation, any increases, although welcome, will need to be sustained before people are convinced that their household finances are really looking up.

What is the outlook for inflation, which has taken a rapid tumble over the last five months from a 3.1% high in November?

It is now at its lowest rate since March last year.

Downward pressure

Some short-term issues have affected this month's figure.

Because Easter was earlier this year - Good Friday fell at the end of March - the effects of the usual price rises for flights over the holiday period did not all fall in April.

And because the rate of inflation is a comparative figure with what prices were doing a year ago, that brought down the rate.

There is also a longer-term trend that is exerting downward pressure on the rate of price increases.

The inflation spike caused by the fall in the value of the pound post the Brexit referendum - a fall that meant our imports of food and fuel were more expensive - has been washing out of the economy more quickly than expected.

That has led the Bank of England to argue that over the next year it is likely that inflation will fall back to the "target" set for itself of 2%.

This is better news for people struggling to make ends meet.

But between then and now, there are likely to be inflationary bumps in the road, all adding to the impression we are not yet fully clear of the incomes squeeze.

First, the price of oil is rising, driven by increased demand because of healthier global growth and concerns over supplies, given America's reimposition of sanctions on Iran, the world's fifth largest producer.

Sterling has also weakened against the dollar over the last month, making buying oil (priced in the US currency) costlier.

That has not only led to higher prices at the pumps - the RAC suggests filling up a family car costs £4.50 more now than it did last July - but also to higher "input prices".

Those are the costs businesses pay for the materials they use to make the things we buy, including fuel and other energy.

image copyrightPA
image captionThe price of fuel has hit a three-and-a-half-year high

The input Producer Price Index rose to 5.3% from 4.4%, costs that are likely to be, at least partially, pushed on to the consumer.

Second, increases in domestic energy bills are due to strike over the next month, with British Gas, EDF, Npower and Scottish Power all raising prices, some by more than 5%.

Third is the "sugar tax" - or the Soft Drink Industry Levy, to give it its proper title.

That has added more than 5% to the cost of many drinks, another addition (although small) to the cost of the weekly shop.

Wednesday's fall in the inflation rate will be welcomed by many consumers.

But it is worth noting that there are still plenty of inflationary pressures ahead which may make this decline the last for a while.

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