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 It is further uncontrolled falls in sterling we should be concerned about, rather than outdated battles about monetary policy.'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

'Too low inflation' warning

Speaking to the Treasury Select Committee about inflation, Mervyn King, Governor of the Bank of England, warned that the risk it could fall below 2% in the medium term has "increased significantly" in recent weeks. He said this was due to the sharp fall in global oil and commodity prices, and declining consumer demand. UK inflation fell to 4.5% from 5.2% in October. The government wants inflation to be as close as possible to 2%. and Bank of England targets the Consumer Price Index, which excludes the effects of mortgage interest payments. "We will take whatever action is necessary to ensure that inflation is close to target in the medium term," Mr King said.
UK interest rates are currently at 3% following a 1.5 percentage point cut at the start of this month, and many economists are forecasting a further cut in interest rates in December. He added that the government's cut in VAT will also help lowe the rate of inflation.

Is there an ideal rate of inflation?

Why is the target set at 2%?

What are the dangers of falling prices?

What is the difference between deflation and disinflation?

Food price rises 'hit UK harder'

The UK is "more exposed" to rising food price rises than its peers, adding to recessionary fears, according to a report by Ernst & Young. Its Item Club says "the implications for business are profound" - making it more likely firms will raise prices. Unlike the US which has a balance of food and France which has a surplus, the UK has a trade deficit in food. The Item Club report says that as food prices keep rising, this reduces the chance of an interest rate cut in the UK. "The danger now is that rising food world prices and energy prices will lead to excessively tight monetary policy", it says, as the government seeks to counter the rise by "squeezing domestic costs". As food and energy prices contribute 1.7% to Consumer Prices Index Inflation - which recently reached 3% - this leaves "little room" for price rises elsewhere. Input costs have risen by nearly a quarter in the 12 months to April, eating into consumers' disposable incomes. Link to article.

The government's 2% inflation target will require a 1.5 percentage-point premium on interest rates because of spiralling food and energy prices. This will lead to sharply lower growth and rising unemployment, as many as 60,000 jobs lost, according to the Item club report, which uses the Treasury model to forecast the economy. It urged the chancellor, Alistair Darling, to exclude food and energy from the inflation target or risk excessive pain for voters in the run-up to the election. Read the Guardian article.

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?

Further evidence of 'cost push' inflationary pressure.

A Confederation of British Industry (CBI) survey shows that manufacturers are raising prices as they face the strongest cost pressures in over 20 years.The CBI said that small and medium firms were struggling with high energy and raw material prices. However, there is some good news as the survey said that despite the prospect of higher costs, manufacturers were taking on new staff. The reasons appear to be that some firms are benefiting from the weaker pound and strong growth in Asia. At the moment price rises were affecting other businesses and had yet to transfer to consumers. Details here.

This was reinforced by further figures published by the government. The price of goods leaving Britain's factories rose at the fastest level in more than 20 years last month as soaring food and fuel bills pushed up the cost of production. In a fresh inflation warning to the Bank of England, the Office for National Statistics said so-called factory gate prices were up by 1.4% in April and by 7.5% over the past 12 months. Both were the highest since the series began in 1986. Read the article.

What factors will determine the ease to which firms can pass cost increases into consumers in the form of higher prices?

Big bakers push supermarkets to add 10p to price of a loaf

Bread prices could rise by 10% as the big bakery groups try to pass on the rising price of wheat to consumers. An interesting development as the large bakery groups enter into negotiations with the supermarket chains who have indicated that they will work hard to protect the postions of their customers. A good example of cost push inflation and the effect of supermarkets on the ability of producers to raise their prices.

http://www.guardian.co.uk/business/2008/apr/23/supermarkets.fooddrinks