IoD: Positive fall in inflation, but households and businesses ‘not off the hook yet’

Responding to official inflation figures  showing the Consumer Price Index fell to 3.0% in December, Tej Parikh, Senior Economist at the Institute of Directors said:

“After peaking last year, inflation appears to be set on a gentle downward course in 2018. That said, households and businesses are not quite off the hook just yet.

“Today’s figures show that price levels fell back from a near six-year high of 3.1% in November, as the impact of the weakened currency – which has driven inflationary pressures – seems to be fading. The fall back in December was driven by a drop in air fares and recreational goods.

“It’s certainly a positive omen for households. With inflation expected to continue falling in the coming months, and potential shortages in the labour market set to exert upward pressure on wages, the real pay squeeze looks like it will ease somewhat. But we mustn’t forget that, for the time being, inflation remains elevated and businesses’ ability to find the extra capacity to raise wages remains constrained.

“Whilst the fall in inflation was not unexpected, the data only reinforces the need for the Bank of England to keep interest rate hikes on hold. That said, there will be little more monetary policy can do to alleviate the pinch to wallets in the short-term. Instead, politicians ought to look beyond the monthly data, and start considering how to better support business productivity in the long-run to give firms the headroom to offer inflation-busting wages in the future.”