Kames Capital: Tumbling inflation will keep UK interest rates at record lows in 2015

Kames Capital’s Scott Jamieson, head of multi-asset, reacts to the news that CPI inflation fell to 0.5% in December, matching the record low seen in May 2000.
“Consumer price inflation (CPI) in UK fell in December to its lowest level (0.5% p.a.) since May 2000; the month-on-month decline was itself 0.5%. The retail price index (RPI) fell by 0.4% to just 1.6%. The MPC’s target is a CPI rate of 2% p.a.
“The headlines are going to blame the slump in the crude oil price; last trading at $46 per barrel, it was priced over $100pb less than six months ago. Certainly the attribution provided by the Office for National Statistics (ONS) highlights the decline in transport and other oil-related components. However the CPI rate has been slipping steadily for some time now and is less than 10% of the level reached in late 2011; only recently have lower energy costs been a contributory factor. Pricing power remains weak and although job creation has been heady it has not been accompanied by even moderate wage growth. Finally, the rise in strength seen through 2013/2014 has also taken its toll.
“Inviting an echo of the substantial windfall out of the PPI-racket seen in recent years, the prevailing judgment is that this ‘oil shock’ will similarly release cash to consumers to spend, stimulating the economy and – eventually – putting upward pressure on the general level of prices. The data suggests that almost all of the PPI cheques were spent immediately – as you might with any unexpected lump sum. Whether the trickle impact of paying less at the pumps will generate the same result remains to be seen. If not then with Europe now in deflation and with Japan effectively exporting its own deflation the downward bias to inflation prints is likely to continue. The money markets now see no rate change out of the Bank of England for at least twelve months. It is hard to see that they are wrong.”
 
Scott Jamieson is head of multi-asset at Kames Capital