Inflation easing despite stronger recovery

CPI inflation fell sharply from 2.7% to 2.2% in October and it looks likely to fall below the 2% target soon. Past falls in global agricultural commodity prices suggest that food price inflation will ease significantly in the coming months. The coalition’s planned cuts to environmental levies on energy bills mean that electricity and gas prices will make a smaller positive contribution to inflation early next year too. What’s more, inflation could come under further downward pressure in the second half of 2014 if sterling’s recent appreciation to its highest trade-weighted level in more than four years is broadly sustained. Accordingly, we continue to think that the economic recovery will be accompanied by subdued inflation.