Many economists think that this week's figures, which showed zero CPI inflation in the 12 months to March, represent the low point for inflation. Fabrice Montagne at Barclays expects the rate to rise from now on, ending the year at around 0.8 per cent.
One reason for this is that last autumn's fall in petrol prices will drop out of the annual inflation rate later this year. So, too, will recent falls in food prices unless the supermarkets' price wars intensify. But there are also more fundamental reasons to expect an increase. In the past few weeks, sterling has fallen slightly, petrol prices have risen and inflation in the euro area has turned less negative. Partly reflecting these factors, the prices of manufactured goods have risen in the past two months, following six months of cuts. "The lack of inflation is likely to be temporary," says Chris Williamson at Markit.
Few, however, expect the Bank of England to raise interest rates quickly. Mr Montagne doesn't expect a rise in Bank rate until at least late this year, while others, such as Martin Beck at the EY Item Club, don't expect a rise until next year. This implies that real interest rates - defined as nominal rates minus inflation in the next 12 months - are lower than they were a few months ago.
One reason for the Bank's reluctance to raise rates is that, although inflation will rise, it is expected to stay below its 2 per cent target: Mr Montagne expects it to be only 1.7 per cent at the end of 2016. "There are few signs of inflation picking up meaningfully," says Chris Williamson of Markit, whose firm's survey shows that employees expect pay growth of only 1.1 per cent this year.
The prospect of such weak nominal wage growth poses the danger that real wage growth will fall as inflation rises. If so, consumer spending growth could fall. This might not depress overall growth if investment rises as post-election uncertainty falls or if exports rise as the euro area's recovery gathers steam, but the Bank will want to see hard evidence of this before raising interest rates.
