Lower inflation can support UK recovery in 2013

18th December 2012

Annual CPI inflation was 2.

7% in November 2012, unchanged from October Annual RPI inflation was 3.0% in November 2012, down from 3.2% in October Output and input producer prices both recorded monthly declines in November 2012 Commenting on the inflation figures for November 2012, published today by the ONS, David Kern, Chief Economist at the British Chambers of Commerce (BCC) said: -The hold in CPI inflation was unsurprising, but marginally lower than predicted for retail and for producer prices. The largest upward pressures on average CPI inflation came from food and from household gas and electricity bills, but these were offset by downward pressures from petrol and furniture prices. Overall, these figures are a little benign, but we mustn't become complacent. Further utility bill increases are likely to drive inflation up in future months, and the recent easing in international pressures on UK inflation could well be reversed in 2013. -Any surge in inflation would be unwelcome news for our economy at a time when the government is implementing a tough austerity plan. Given the weaknesses in the eurozone and elsewhere, there is only limited scope for the UK to rebalance its economy towards exports in the next year. In these circumstances, the boost to real income provided by lower inflation could be an important factor underpinning domestic demand in 2013. -In our recent forecast, we predicted that CPI inflation would fall slightly to 2.5% in 2013. However even if annual CPI inflation falls below the 2% target, this should not be resisted by the use of additional QE. Instead the MPC and the government should concentrate on measures that support growth directly, and go further to boost lending to businesses.