• New Cebr forecasts show CPI inflation of –0.3% in March and –0.1 % in April.
• For 2015 as a whole inflation is expected to average just 0.4% – the lowest annual average on record.
• The Bank of England is expected to keep rates on hold until February 2016.
• Record low inflation and rising earnings will lead to an acceleration of consumer spending growth as the cost of living crisis comes to an end.
• UK economy to achieve growth of 2.6% this year.

 

New predictions by award-winning forecaster Cebr show that the UK is on course to experience a period of “good deflation” as the prices of food, petrol, gas and a wide range of other consumer goods fall back over the coming months.

 
The forecasts show that annual inflation on the headline consumer price index (CPI) measure will stand at –0.3% in March and –0.1% in April.  Inflation on the headline CPI measure has never stood in negative territory before so new records will be set this year.

 
Although inflation is expected to pick up towards the end of the year (see Table 1), the average for 2015 as a whole is just 0.4% – the lowest annual average on record. Such a weak outlook for price growth means that Cebr now expects the Bank of England to keep rates on hold until February 2016.

 
Unlike in the Eurozone, where there is a risk of a negative spiral of falling prices and weakening economic performance, the UK’s bout of deflation is expected to be short-lived and virtuous, as the declining prices of essentials increase household spending power. Earnings will grow comfortably above inflation over the coming months.Figures released in the latest ICAEW/Grant Thornton Business Confidence Monitor show that firms expect salaries to rise by 2% over the next 12 months.
 
The ICAEW/Grant Thornton survey also shows input price growth for businesses falling back, reflecting declines in the price of oil and other major commodities. Cebr expects the price of Brent crude oil to average less than $60 per barrel over 2015.
 
Overall, rising consumer spending is expected to allow the UK economy to maintain momentum despite a deeply concerning global backdrop – with the Eurozone at risk of recession and major emerging economies such as China slowing. GDP growth of 2.6% is forecast for this year, unchanged from 2014 on current estimates (Cebr expects growth in 2014 to be revised up slightly – the official figures appear to underestimate the strength of the construction sector last year and are at odds with other business surveys).

 

Scott Corfe, Head of UK Macroeconomics at Cebr says, “record low inflation and rising earnings are going to drive the UK economy ahead this year, as households find themselves with more money to spend on discretionary purchases.”

 

“While the economy isn’t anywhere near as balanced as policymakers want – growth is still overwhelmingly driven by household spending rather than exports and investment – a consumer-led recovery may be just what we need this year to maintain momentum. Expect growth in 2015 to be about the same as last year”

 

 

Scott Corfe
Head of UK Macroeconomics