Inflation creates risks for UK recovery prospects

16th January 2013

Annual CPI inflation was 2.

7% in December 2012, unchanged from October and November Annual RPI inflation was 3.1% in December 2012, marginally up from 3.0% in November Annual producer price inflation slightly up in December 2012, for both output and input prices  Commenting on the inflation figures for December 2012, published today by the ONS, John Longworth, Director General of the British Chambers of Commerce (BCC) said: -Inflation seems to be pausing for breath at the moment, with CPI inflation remaining unchanged for the third successive month in December at 2.7%. However, we expect that inflation will start to rise in the near term, as further rises in utility and food prices kick in. Our latest quarterly economic survey revealed that businesses expect price rises over the coming months. Higher inflation is clearly a concern for the UK economy as it increases the squeeze on both businesses and consumers, further exacerbating an already weak economic environment. -Against this backdrop, the government needs to do more to support the economy and kick-start growth. Recent steps to improve access to finance, such as the commitment to create a business bank, are welcome, but must be implemented at scale and with clear timetables. This will help to build business confidence at a time when the economic climate they are operating in is highly uncertain. David Kern, Chief Economist at the BCC, added:  -The unchanged annual CPI inflation figure was widely expected by most analysts. Utility bill increases provided the biggest upward influence on the December figure, but this was countered by downward pressure from transport costs, particularly air fares. At its present level, annual CPI inflation is 0.5% higher than the recent 2.2% low reached in September, and the average figure for the fourth quarter of 2012 is higher than envisaged by the Bank of England in its November inflation report. The immediate outlook is uncertain: our view is that inflation will edge up a little more in the early months of 2013, before slowing later in the year. But falls in inflation will not be as much as previously predicted, and it is questionable if we will see a return to the 2.0% target before 2014. -Any increase in inflation would be unwelcome news for the British economy, at a time when the government continues to implement a tough austerity plan. Given the difficulties of achieving rapid increases in exports while the eurozone economy is facing risks of recession, any boost to lower incomes provided by lower inflation could be an important factor underpinning domestic demand in 2013. Given the risks of higher inflation, we reiterate our view that the Monetary Policy Committee should resist pressures for an increase in QE.