Tuesday, February 13, 2007
2.7% and no letter
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

People thought it would be touch and go for the January CPI and whether it would rise above 3%, occasionng a letter from the governor. In the event, lower petrol prices saved the day, giving a "comfortable" 2.7% number. RPI inflation was 4.2%, RPIX came back into its old range at 3.5%. More details:

Consumer Prices Index (CPI) annual inflation – the Government’s target measure – was 2.7 per cent in January, down from 3.0 per cent in December, according to new figures from the Office for National Statistics.

The largest downward effect on the CPI annual rate came from transport costs. Prices of fuels and lubricants fell this year, but rose a year ago. There was an additional large downward effect from air travel, mainly due to changes in the cost of fares to European destinations.

Other large downward contributions came from food and non-alcoholic beverages, with prices falling by more than a year ago across a range of produce, and from communication costs, mainly due to increases last year in some landline charges, compared with little change this year. There were also small downward contributions from mobile phone handsets and charges.

The largest upward effect came from alcohol and tobacco, due to cigarette prices increasing this year for all brands, compared with little change a year earlier.

RPI inflation fell to 4.2 per cent in January, down from 4.4 per cent in December. The largest downward effect on the RPI annual rate came from household goods, where there was a record month-on-month fall in furniture prices with widespread price cuts across a range of items. This follows a record increase in the previous month.

Housing costs excluded from the CPI had a large upward effect on the RPI this month, mainly due to the mortgage interest payments component, with some lenders passing on January’s quarter point increase in the Bank rate. A further small upward contribution came from the depreciation component (the amount needed to maintain the dwelling at constant quality). The other main factors influencing RPI were similar to those affecting the CPI.

RPIX inflation – the all items RPI excluding mortgage interest payments – was 3.5 per cent in January, down from 3.8 per cent in December.

Comments

"Comfortable" - with the inverted commas being highly significant! 2.7% is still way way above the Bank's target and they certainly should not be applauded for letting inflation get so high in the first place. Especially when you look at real inflation, rather than the fiddled Chav Price Index.

Posted by: Burt Harbinson at February 13, 2007 02:43 PM

If we can believe the Governor that "inflation will fall significantly in the second half of the year" CPI inflation will soon be very close to the governments target. Although the divergence between CPI and RPI is quite marked. I feel the RPI would be a better, as a measure of the cost of living, which is the whole point of measuring inflation.

Posted by: R.Pettinger at February 14, 2007 03:15 PM

If we can believe the Governor that "inflation will fall significantly in the second half of the year" CPI inflation will soon be very close to the governments target. Although the divergence between CPI and RPI is quite marked. I feel the RPI would be a better, as a measure of the cost of living, which is the whole point of measuring inflation.

Posted by: R.Pettinger at February 14, 2007 03:24 PM

Dear David,

I believe that there is that portion in the value of the pound which can be attributed to overzealousness of the marketeers.Or it can be simply that the pound overshadows other currencies because of the bullishness of the funds/traders.

I have also noticed that the last two rises in interest rates have failed to move the pound to distinctive increases in the value of the pound against the dollar.

Therefore any decreases in fuel prices and other CPI components will not have any impact on inflation as the pound may fall whilst
interest rates continue to increase.It is imperative that the Governors forecast of lower inflation in the second half of the year may be offset by the decreasing value of the pound.

Posted by: Hitesh Damani at February 16, 2007 12:21 PM

Not sure I entirely get your drift, but if you're worried that the pound is suddenly going to fall and push up inflation, that would go against the record of the past ten and a half years, when sterling has been remarkably stable.

Posted by: David Smith at February 16, 2007 04:33 PM