"UK inflation - now it's deflation
The latest figures make grim reading:
The annual RPI rate - the country's broadest measure of inflation - fell to 0% in February after recording 0.1% the month before, according to figures from the Office for National Statistics. Today's was the weakest reading since 1960.
The measure which causes that concern is inflation, but there are different ways of measuring . It used to be by the Retail Price Index, which rates the change in the cost of a fixed basket of retail goods.
But the government prefers the Consumer Price Index, which also includes services, housing, electricity, food, and transportation. The figures are collected and published each month by the Office for National Statistics.And then:
Inflation surprises with jump to 3.2%
By Daniel Pimlott, Economics Reporter
Published: March 24 2009 10:13 | Last updated: March 24 2009 22:01
Fears Britain might enter a deflationary spiral receded on Tuesday after inflation rose in defiance of expectations last month.
As the sharp fall in the value of the pound fed through in the form of higher prices for shoppers, the consumer price index increased from 3 per cent in January to 3.2 per cent in the year to February, confounding economists’ forecasts of a further fall to 2.6 per cent. Inflation has fallen from a peak of 5.2 per cent in September.
The data appear embarrassing for the Bank. It has cut interest rates to the lowest level in its 315-year history and begun an unprecedented programme to create money and to buy assets.
But Mr King said the rise in inflation reflected retailers’ decisions to pass on the fall in sterling to consumers – although he was optimistic about the medium-term implications. “Even if we see significant pass-through of the depreciation of sterling, it may mean inflation is close to the target rather than below it. I don’t see a large risk of inflation being significantly above it,” the governor told the Treasury committee on Tuesday.
The effect of higher import prices – reflecting sterling’s near-28 per cent drop in value since the summer of 2007 – seemed to be evident in some categories that made the biggest contribution to the inflation rate.
Life becomes cheaper for many richer families
The poorest and oldest people in society are experiencing much higher rates of inflation than other citizens, writes Chris Giles.
The items with the largest falls in price in Tuesday’s figures – mortgage interest payments and petrol prices – matter much more to the rich than the poor. Consequently, life is getting cheaper for most richer families, according to research by the Institute for Fiscal Studies. Food prices, by contrast, are up by 11.3 per cent over the past year, while electricity and gas for cooking, light and heating are up 22.3 per cent. So poor and elderly people, for whom these are big budget items, are much harder hit than the headline inflation rate would suggest.
The Office for National Statistics calculates the retail and the consumer price indices by monitoring thousands of price changes and weighting the results by the amount the nation spends on each item. The rich spend a lot more than the poor, giving the wealthy a much bigger weighting in the overall RPI or CPI than a household with average income.
This is not usually an issue because price changes are similar across goods and services consumed disproportionately by the rich and poor. “The differences tend to even out over time – it is not true to say the poor always do worse [on inflation],” says Zoë Oldfield, of the IFS.
But this is not the case at present, with price rises on the essentials of life far outstripping those on relative luxuries. As a result, there are huge differences in the inflation rates experienced by households of different ages, incomes and housing tenure.
If you average all households’ inflation rates, you get 1.6 per cent, the IFS says – significantly higher than the zero RPI inflation which is the average for all expenditure.
But analysis of household inflation by the IFS also reveals that, as in so many things in life, the rich count for more than the poor when it comes to the cost of living.
Continued sharp rises in food prices were responsible for faster-than-expected increases overall. Food inflation stood at 12.5 per cent in February, compared with 11.1 per cent in January. Within that, prices for fresh vegetables were up by 18.6 per cent, partly due to cucumbers and courgette prices rising after a poor Spanish harvest.
The cost of meat was up by 15.2 per cent. A spokesman for the British Retail Consortium said farmers were increasingly exporting meat rather than selling it in the UK because of higher prices offered abroad.
Other categories where figures showed a marked rise in inflation were games, toys and hobbies, transport costs, household appliances and clothing and footwear.
Games and toys showed a 2.5 per cent increase in prices during the month, while on an annual basis they were down by 0.1 per cent after falling by 6.4 per cent in December. Toy imports make up 85 to 90 per cent of all toys sold in the UK, according to David Ackerman, chairman of Equitoy, a trade association of toy importers.
The ONS added the rise in inflation also reflected companies increasingly deciding to reverse the value added tax cut implemented in the pre-Budget report last year. Some companies said they were reinstating prices that had prevailed before the VAT cut, as it was company policy to do so, but most said the decision reflected higher import prices, according to an ONS statistician.
Continued strength of inflation despite deepening recession made it increasingly unlikely the UK would face a prolonged period of deflation, economists said.
The broader retail price index fell to a 49-year low in February of 0 per cent. Economists had expected it to plunge to -0.7 per cent. However, that reflected sharp falls in housing costs and energy prices for households, rather than big changes in retail costs.
Longer term, an array of forces will bear down heavily on prices. Falling fuel costs will erode headline inflation.
Rising unemployment and increasingly weak international trade will also open up a gap between the capacity of the economy and level of demand, driving prices lower. As the effect of sterling’s decline disappears from the index, inflation will also fall.
“Aggregate demand is falling away rapidly,” said Ben Broadbent, an economist at Goldman Sachs. “Regardless of the exchange rate, it’s reasonable to say inflation will fall away next year.”
Economists expect that while the RPI will fall for an extended period of time – thanks to the fall in mortgage interest costs – the CPI will turn negative only briefly this autumn.
Will deflation – the concept dreaded by economists and politicians alike – at least briefly stalk the land? No, says George Buckley, an economist at Deutsche Bank. For that to happen “a sustained decline in the price of goods and services” would be required. The risk of that had now diminished.
Copyright The Financial Times Limited 2009