Tuesday, September 18, 2012
Inflation fall needs to go further
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Consumer price inflation dropped from 2.6% in July to 2.5% in August, with retail price inflation down from 3.2% to 2.9%. Both falls were welcome and imply that inflation - 5.2% last September - has halved in less than a year.

According to the Office for National Statistics: "The largest downward pressures behind the change in the CPI rate came from furniture, household equipment & maintenance, housing & household services (particularly domestic gas) and clothing & footwear. These were partially offset by an upward pressure from transport (particularly motor fuels)."

The question is what happens next. The ONS notes that petrol prices fell between August and September last year, while they have risen this September. Some gas and electricity prices will be rising in the autumn, as has already been announced. The poor summer and weather events around the world will push up food prices.

On the positive side, the latest figures continued a pattern in which inflation has been generally subdued in 2012. The consumer prices index in August was less than 1.2% up on its December 2011 level. Although there are seasonal patterns in inflation, this implies that inflation this year has been running below the 2% target.

Can this continue? For inflation to fall further monthly rise sin the index have to be lower than a year ago. That looks achievable in September - last year the index rose by 0.7% - but more of a challenge for October and November, when the increases were 0.1% and 0.2% respectively.

This is not just a matter of statistical interest, of course. Even at 2.5% inflation, prices are rising a percentage point faster than average earnings. To restore the growth in real incomes, and get consumers spending more, inflation needs to drop below 2%. That is still far from guaranteed. More here.

Separately, the Office for National Statistics, said it would review the construction of the retail prices index to deal with a longstanding anomaly, the so-called formula effect, which boosts measured retail price inflation.