Rail fare increase signals light at the end of the tunnel for UK inflation

Rail commuters facing a steep 3.6% increase in ticket prices might find it tough to accept but there is light at the end of the tunnel for UK inflation.

Rising prices have been one of the big economic stories of the past 12 months, but for the past two months the financial markets have been surprised by the weakness of cost-of-living pressures.

The reason for that is simple: the two factors that have been driving inflation higher since the summer of 2016 – higher global oil prices and the sharp fall in the value of sterling after the EU referendum – have almost washed through the system.

A quick look at the Office for National Statistics data for producer prices helps explain what has been going on. Producer prices are a measure of inflation early in the supply chain, since they gauge both the cost to firms of buying in fuel and raw material, and the prices of goods as they leave factory gates.

Fuel and raw material prices rose fast in the second half of 2016, with the annual rate of increase peaking at 19.9% in January. Since then, though, it has fallen month after month, dropping from 10% in June to 6.5% in July.

Factory gate prices showed a similar, although less dramatic profile. They were rising at an annual rate of 3.7% in February and March, but have now slipped back to 3.2%.

As Ian Kernohan, economist at Royal London Asset Management, put it: “While there is still some residual impact of sterling devaluation to feed through, with underlying inflationary pressures low, we think that consumer price inflation is close to topping out for the immediate future.”

It’s not all good news, of course. There is probably still in the pipeline some residual inflationary pressure caused by sterling’s fall which will show up in the coming months. The Bank of England expects consumer price inflation to reach 3% later in the year.

What’s more, despite the better-than-expected inflation data in the past two months, prices are still rising faster than wages. The squeeze on living standards will continue for a while yet, even though the pressure on real incomes will not be quite so pronounced.

But with the economy moving at the pace of a slow-moving commuter train, the prospect of inflation rising to well over 3% now looks remote.

The author: Michel THEYS

Michel Theys, a Belgian native, began his career as a civil servant, serving the public for several decades. After retirement, he shifted gears to follow his passion for journalism. With a background in public administration, Theys brought a unique perspective to his reporting. His insightful articles, covering a wide array of topics, swiftly gained recognition. Today, Michel Theys is a respected journalist known for his balanced and thoughtful reporting in the Belgian media landscape.

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