UK inflation: A positive surprise for prices

 

Anyone looking for evidence of homegrown price pressures will struggle to find it in the latest inflation numbers.

Against expectations, the "headline" rate has fallen from 4.5% to 4.2%.

But we know the monthly figure has been jumping around.

That will be less interesting to the Bank of England than the forces acting underneath.

Once again, the price rises are almost all concentrated in the areas where consumers and - to a lesser extent - retailers have least room for manoeuvre, notably food.

The food index is now 6.9% higher than a year ago, compared to an annual rise of 5.8% in May.

Rising food prices are nothing new. The reason the overall CPI has still managed to fall by 0.3 points is that prices have been flat or falling in the parts of the economy where consumers have greater discretion.

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If it sounds like it might be fun to buy, it's a fair bet the price has gone down”

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That shows up clearly in the sharp decline in the CPI "core" index, which excludes food and energy, from 3.3% to 2.8%.

Put it another way, it's hard work these days trying to sell things to people they don't strictly need - as any "consumer facing" company will unhappily confirm.

"Recreation & culture", "leisure services", "clothing and footwear" - if it sounds like it might be fun to buy, it's a fair bet the price has gone down.

Prices in the broad, "recreation and culture" category are now 0.5% lower than last June.

That's the largest fall since the start of 2009, in the depth of the recession, and the first negative number for that category in more than two years

The net result is that prices, on average, have fallen between May and June, for the first time since 2003.

I don't think the Bank's economists will be tearing up their forecasts on the basis of this month's figures.

The chances are that inflation will rise again before it comes down for good - for example remember all those gas price rises we now have waiting for us in the autumn.

Another non-discretionary purchase we will all now be forking out more for.

But when you combine these figures with increasingly downbeat expectations for next week's GDP number, it's been a good few weeks for the doves on the MPC, who think the UK economy will be in the high dependency unit for some time yet.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    +1

    Comment number 150.

    reading the comments, I don't there are many people happy with your spin of "rate has 'fallen' from 4.5% to 4.2%" as 'good'. Too many people feeling the _real_ inflation in food, rent and essentials, the kick in the teeth from insulting savings rates and previous government raid on pensions, freeze in pay packets are REALLY ANGRY. BoE and Merv's unadmitted campaign to inflate debt away is hurting.

  • rate this
    0

    Comment number 149.

    re #127/#128
    Good posts.

    I think we really urgently need an Essential Prices Index.

    Hard luck on the lettuce - but they can be hit by seasonal and weather variables. I have had a couple of Icebergs in the last month from a major supermarket for 60p a pop each time but am surrounded by farms. Have turned away from them on counter at £1-20 (in season) within the last three years though ...

  • rate this
    -3

    Comment number 148.

    Growth - real growth in output - remains our best way of dealing with both the fiscal deficit and inflation. Sustained growth from 1996 to mid-2008 saw both inflation falling to low levels and tax revenues growing as income & corporate tax rates fell. We even managed to repair our long neglected education, NHS and public transport.

    Now, money supply & output are falling. Growth's the answer.


  • rate this
    0

    Comment number 147.

    The Monetary Policy Committee's decision to keep interest rates very low means that the pound sterling is weak, imports cost 20% more and thus the cost of living has become high.

    We need a year or two of negative inflation to bring prices down to where they would otherwise have been. To do this means raising interest rates to about 3% above inflation.

  • rate this
    0

    Comment number 146.

    There are a few people measuring the current situation by the price of commodities in supermarkets. Well I have my own twist on this, I look at how many people still buy prepacked fruit and veg which often come in at 2-3 times higher than loose. When I see this dropping off then I'll know we're in real trouble. So yes times are hard and going to get harder, but we're not there yet.

 

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