Inflation remains at record low but likely to rise towards end of 2015
Inflation or Deflation?
The rate of inflation in the UK economy has turned negative for the first time in half a century. The latest data from the Office for National Statistics recorded an inflation rate for the year to the end of April of -0.1%. This compares to rate of zero inflation in February and March. This is the lowest level since comparable records began in 1989, and ONS have estimated that it is the first time it has happened since 1960. The main drivers of this low inflation are falling oil and gas prices, and the cost of clothing. There has been talk of inflation potentially staying negative over time, meaning that average prices actually become lower over time. This is known as deflation, and generally regarded as a bad thing in economics as it is feared than in a period of prolonged deflation, consumers and businesses put off spending and investment decisions today because they think it will be cheaper tomorrow. This means that the economy stalls because of a lack of activity, and it can become very hard to get out of this deflationary spiral. Indeed, Japan has struggled with deflation for the last two decades.
However, the risk of any prolonged period of negative inflation seems very low. The shift to lower levels of inflation have largely been driven by external factors, such as lower energy prices and the appreciation of sterling (leading to lower prices for imports), with a small part down to the domestic drag of weak wage growth. In their May 2015 Quarterly Inflation Report, the Bank of England forecasts that these factors will drop out towards the end of 2015, and the annual rate of inflation will start to rise back to their target level of 2% by March 2017. The cost of crude oil has started to rise over the past couple of months, peaking at around $70 last week (up from the record lows of $50 at the start of the year). Wages are also starting to see growth, with the latest report showing wage growth up from +1.9% in March to +2.2% in April.
With the rate of inflation likely to start picking up towards the end of 2015, the talk with inevitably shift to if – and more likely when – interest rates will move up from their historic lows of 0.5%. The Governor of the Bank of England has repeatedly said that the market is treating the base rate as “remarkably flat”, and are not sufficiently pricing a future rate rise in. This has been suggested that a rate rise is being actively considered, but it is likely that the Bank of England will want to see more data on economic growth and pent up demand before acting.
Motor vehicle sales breaking new records
Demand for new vehicles continues to be very strong in the UK, helping support the continued growth and expansion of a key sector for the Coventry & Warwickshire economy. According to the Society of Motor Manufacturers and Traders (SMMT) new car sales in April were up 5.1% on the same month the previous year, and it is now a record 38th consecutive month in the UK where car sales have been increasing. Not only that, but the total sales in April of 185,778 vehicles is the most in that month since 2005.
This strong demand in motor vehicles is slightly at odds with reports across the manufacturing sector suggesting a slowdown in activity in recent months, but highlights growing consumer confidence. Looking underneath the figures on car sales suggests strong growth in smaller, more fuel efficient vehicles and an increase in demand for hybrid vehicles, suggesting that consumers are looking to reduce their running costs while at the same time benefitting from very attractive finance packages for new purchases that are currently on the market.
Unemployment continues to fall
Warwickshire’s Job Seeker Allowance (JSA) claimants have fallen from last month by 125 to 3,426; equating to a 3.5% drop in unemployment. This is slightly lower than the national figure (-3.6%); but since trends are consistent; the county is performing well. An extra 200 people are now back in work compared to the start of the year (January), due to the transition from temporary (seasonal) employment to permanent employment as the new financial year begins.
Stratford-on-Avon experienced the biggest drop in unemployment from March (-11.4%), and had the lowest number of claimants in Warwickshire at only 304. This is about half the number of claimants in Warwick (621), and the decline is nearly three times faster than Warwickshire as a whole (-11.4%). North Warwickshire performed the second-best, with 30 fewer claimants (-7.4%) than last month. On the other hand, Nuneaton makes up nearly half of Warwickshire’s total claimants (1,539) and saw the smallest decrease in unemployment of -0.6%.
In general, all age groups benefitted from a fall in unemployment. This excludes the over 50s; where there was a 2.9% increase in claimants for over 6 months. Despite this, total short-term claimants in Warwickshire did not change from the previous month. However, there are now 30 fewer long-term claimants (-3.4% fall), which suggests the gap between short-term and long-term claimants is narrowing.