Inflation still set to fall

The recent rise in gasoline prices won’t prevent inflation from falling, but it will limit just how far and fast it drops. What’s more, evidence of a strengthening in underlying price pressures suggests that the fall in core CPI inflation will also be less marked. The latest data on rising unit labour costs is a particular concern. And with employment rising at a faster rate than output in the current quarter, further rises may be on the cards. Nonetheless, as the sharper rises in energy prices seen last year drop out of the annual comparison and as businesses struggle to pass on higher labour costs, by the end of the year both headline and core CPI inflation should be back below 2%.