Inflation subdued despite strong recovery

While the economic recovery has remained strong, there is still little sign that inflationary pressuresare emerging. CPI inflation was just 1.6% in July and the recent decline in import prices, fall in oilprices and continued weakness of both manufacturing and service firms’ output prices suggests that itcould fall to as low as 1% by the end of the year. (See Chart.) Admittedly, productivity will have torecover soon if inflation is to remain subdued thereafter. But there are tentative signs thatproductivity is beginning to edge up – quarterly growth in employment slowed to 0.5% in the threemonths to June and the composite employment balance of the CIPS/Markit surveys fell in August,despite growth in output strengthening. Accordingly, we continue to think that the UK is set foranother couple of years of strong growth together with below-target inflation.