Reports of deflation’s death are exaggerated – sure, the CPI index has risen from -0.1pc in April to +0.1pc in May. But many important things are still getting cheaper: food, for example, costs 1.7pc less than this time last year. And the prices of larger-ticket items, the so-called ‘consumer durables,’ fell an average 2.6pc in May – the sharpest year-on-year drop since Labour’s 2009 emergency VAT cut.
But as the above graph shows, Citi reckons (pdf) that inflation will not bounce back to where it was before. Sluggish pay and a strong pound mean we’re in for a relatively long period of stable prices. Its chief economist, Michael Saunders, sums it up thusly:-
‘A fairly lengthy period of low-flation (ie inflation that shows a positive but below-target YoY rate) is likely, reflecting the subdued pace of pay growth and disinflationary impact of the marked appreciation of sterling (the trade-weighted index is up 15-16% since early 2013). Our base case at present is for CPI inflation to rise from an average of 0.3% YoY in 2015 to an average of 1.3% YoY in both 2016 and 2017, remaining below the 2% target even in 2018.’