Inflation up ...and down!

The rising price of imported goods - particularly fruit, vegetables and toys - has caused an unexpected rise in one measure of UK inflation. The Consumer Prices Index (CPI) was pushed up to an annual rate of 3.2% in February, from 3% a month earlier. But a sharp fall in mortgage repayments caused the Retail Prices Index (RPI), which includes housing costs, to fall to zero for he first time in 49 years. Economists had predicted that both measures of inflation would fall.

Link to BBC News

Some interesting links on the BBC News site. One explains who the likely winners and losers are from the inflation changes whilst another enables individuals to calcualte their own inflation rate by completing a table of their expenditure, providing a good illustration of how an average rate masks the experiences of individuals.

Are you an inflation winner?
Calculate your inflation rate

The basket of goods used to calculate th einflation index has also been revised. LInk

What type of inflation is the UK experiencing? If the authorities wished o bring it back within the governments target range of 2%, what could they do? Would this be appropriate in the light of the current state of the economy?

UK inflation rate declines to 3%

Consumer Prices Index (CPI) inflation fell slightly in January to 3%, from 3.1% in December, figures have shown. CPI inflation has now fallen for four months in a row from a high of 5.2% in September, driven down by falls in energy costs and fuel prices. Retail Prices Index (RPI) inflation, which includes mortgage costs and is often used in pay negotiations, fell to 0.1% from December's 0.9%. The drop in RPI may lead to pressure on employers to limit pay rises. The headline RPI rate of 0.1% is the lowest rate it has been since 1960. In addition to falling energy prices, the reduction in VAT from 17.5% to 15%, announced in the pre-Budget report in November, also had an effect.

Link to BBC News

According to The Guardian, sterling, not inflation, is the real worry. Whilst there is some concern that inflation has not fallen as much as expected...'what little inflation remains in the system is a symptom of the falls in sterling that have already happened; not a cause of anything more worrying in itself. It is further uncontrolled falls in sterling we should be concerned about, rather than outdated battles about monetary policy.'

Link

Big fall in UK inflation

Consumer price inflation fell sharply in December to an annual rate of 3.1% from November's figure of 4.1%. The biggest factor was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report on 24 November, the Office for National Statistics said. But high food, gas and electricity prices prevented the rate from falling as fast as economists had predicted. The headline Retail Prices Index (RPI) measure fell to 0.9% from November's 3% rate, the biggest fall in 28 years.

Link to BBC News

FT Video

What is the 'real' rate of inflation?

A superb article by John Kay (Full article here) on the differences between the official rate of inflation, as measured by the CPI (currently 3%) and perceptions of inflation. 'There has always been scepticism about official measures of inflation, but the gap between popular perceptions and the government’s statistics has never been so wide.The popular newspapers have sent intrepid reporters down to the shops to discover the truth, by filling a typical shopping basket. The results are “alarming”, “the most savage increase in living costs for a generation”. The Daily Express found an 11½ per cent increase in prices, the Daily Mail put it at 15 per cent.Yet what the Office for National Statistics does is just what the Express and Mail did, except that the ONS does it much more carefully.

As he points out, the CPI is an average and as such 'disguises a range of experiences' and it is the 'most salient prices' that form our perceptions of inflation. 'The price of petrol is highly salient: not only do people buy petrol regularly, but even when they are not buying it, they routinely pass signs that display the price. We are most observant of the prices of goods we buy regularly and often and of the cost of undifferentiated products, such as petrol or milk, for which price comparisons are easier and likely to stick in our minds.' He points out that perception of inflation is not determined by the ONS but by experieince.

Government 'should change inflation target'

Consumers will be "crucified" unless the government changes its inflation target, a leading economist has warned. Peter Spencer from the influential Ernst & Young Item Club is urging ministers to change the 2% inflation target used by the Bank of England. He warned that interest rates would have to stay at 5% if inflation is to be brought down to 2%. He added that keeping interest rates at their current level would hurt hard-pressed households. Professor Spencer said consumers were paying the price for an inflation target that had become unrealistic given the volatility of oil and food prices. He called for the Bank of England's remit to change so it focused on "core inflation", a measure that excludes food and energy prices and is used in the US. Read details here.

David Smith's piece in the Sundaty Times also makes an interesting read, especially the divergence between base rate and other interest rates in the economy, those that have a real impact on economic activity. Link to article. Geoff Riley provides a summary of the key points on the tutor2u blog. Link

Does the CPI reflect the 'real' level of inflation in the economy?

Headline inflation up to 3% - further interest rate cuts in doubt?

UK consumer inflation reached its highest level in 13 months driven by high food and fuel costs, according to the Office for National Statistics. The Consumer Prices Index (CPI) hit 3% on a yearly basis in April, up from 2.5% in March. The monthly rate was 0.8%, the biggest leap since May 2001. According to the figures, the Retail Prices Index rose to 4.2% from 3.8%. The inflation data would probably stop the Bank of England cutting interest rates in the near term, analysts said. "It was a pretty horrific headline number," said Lee Hardman, an economist at BTM-UFJ. "It limits the scope for monetary easing from the Bank, it will be hard for them to cut in June." However, some analysts added that the main drivers of price growth were fuel and food costs, which higher interest rates did little to control or rein in. UK inflation jumps to 3% in April

Listen to Melvyn King, Governor of the Bank of England, presenting this month's Inflation Report. Click here for link. He is quite pessimistic about the short term outlook but believes inflation will be back on target in the near future. He outlines clearly the inflationary pressures currently affecting the UK economy. Most significantly he stated that the NICE decade was over - NICE means non-inflation continuous expansion.

This BBC News clip explains the underlying pressure on prices. Click here for 'Why inflation keeps rising'.

Why do analysts think that further interest rate cuts are unlikely? What are the main causes of the current increase in prices? What type of inflation is this?