Falling inflation enhances recovery prospects

The last month has brought more good news on inflation. CPI inflation eased from 1.9% to 1.7% in February, the lowest rate since October 2009. Meanwhile, past falls in commodity and import prices suggest that inflation will continue to descend over the coming months. Recent price pledges by supermarkets and energy suppliers have also increased the chances that both food and energy inflation ease all the way to zero later this year. We therefore continue to think that CPI inflation could fall as low as 1% by the end of the year. This should enable real earnings to finally recover and hence provide more solid foundations for further growth in consumer spending this year.