Fall in oil prices leads to lower inflation

CLA Senior Economics and Rural Business Adviser Charles Trotman reviews how a fall in the price of oil impacts inflation rates

According to the Office for National Statistics (ONS), the monthly inflation rate for November was 10.7%, a fall from the October rate of 11.1%. The reduction is mainly due to a fall in the oil price.

However, the underlying trend is still that the UK is entering a period of recession, as forecast by the Bank of England and the Office for Budget Responsibility.

Although fuel prices may have fallen from their record highs in October, food prices are continuing to increase, up by 0.1% to 16.5% for November.

Some analysts are saying that inflation actually peaked in October and will now begin to fall. This is based on falls in the price of commodities and in the secondhand car market. Nevertheless, for the agrifood sector, the ongoing rise in food prices highlights that raw material and input costs remain high at the point of production and it could be some time that inflationary pressures begin to ease in the supply chain.

As importantly, the Bank of England is due to consider what to do about interest rates. At last month’s Monetary Policy Committee, interest rates were increased by 0.75% to 3%. Economists are suggesting that rates will increase further, possibly by 0.5% to 3.5%, in order to stem demand. Forecasts suggest that the aggressive policy to dampen demand and put pressure on inflation could see interest rates peak at 4.5% by the middle of next year.

Key contact:

Charles Trotman
Charles Trotman Senior Economics and Rural Business Adviser, London