Danny Gabay at Fathom Consulting warns that although consumer price inflation will fall in the next few months, it could rise above 2.5 per cent again later next year. This rate matters, because the Bank of England has said that it will "knock out" its commitment to keep the bank rate at 0.5 per cent until unemployment drops below 7 per cent if it expects inflation to breach 2.5 per cent.
One reason to expect higher inflation is that labour productivity is stagnating. Official figures show that total hours worked rose by 0.8 per cent in the three months to July, which is slightly more than the NIESR's estimate of GDP growth in the period. This means unit wage costs are rising despite low wage growth. At the same time, demand is picking up as households dip into their savings; the CBI is expected to report next week that retail sales are accelerating. "The UK has experienced a negative supply shock which has now been combined with a positive demand shock. Both of those lead to higher inflation," says Mr Gabay.
Furthermore, prices are rising for reasons outside the Bank's control. Higher utility bills and university tuition fees added 0.8 percentage points to inflation last month, a problem that could get worse when rail fares rise in January.
But not everyone is so pessimistic. Philip Shaw at Investec expects low global inflation to hold down UK prices. Notably, UK manufacturers have raised their prices by only 0.2 per cent in the last five months. Chris Williamson at Markit adds that as long as real wages are falling, companies will be reluctant to raise prices, for fear of seeing demand drop. The Bank's knockout is "unlikely to be activated", says Mr Shaw.
That 'knockout' applies not to actual inflation, but to the Bank's expectation for inflation in 18-24 months' time. The biggest danger for savers is that the Bank continues to under-predict inflation, which would give us the combination of continued low interest rates while our wealth is eroded by rising prices.
