UK Inflation Rate Slows Again In July
Sector: General
17th August 2010
UK inflation eased to 3.1% in July from 3.2% in June, the third month in a row that prices have risen more slowly. However, the Consumer Prices Index (CPI) is still well above the Bank of England's 2% target rate. The Retail Prices Index (RPI) slowed to 4.8% from 5% in June, the Office for National Statistics (ONS) said. The Governor of the Bank of England will now have to write to the chancellor of the exchequer explaining why inflation is still above target.
The July inflation figures are watched particularly closely, as they are used to set rail fare increases for the following year. Many people are getting a little worse off each month. The wide measure of the cost of living - which includes housing costs - is the Retail Price Index. It rose by 4.8% in the year to July - 5% in the year to June 2010.
But, according to the Office for National Statistics, average earnings in the year to June rose by only 1.3%. So most people in work have less spending power now than they did a year ago. And this fall in what economists call "real incomes" - earnings after taking account of inflation - looks set to continue. Inflation is likely to remain high throughout 2011 and recent wage settlements suggest that many employees will see a further fall in real incomes next year. The changes affect regulated rail fares, which include long-distance off-peak journeys. This comes after some fares fell at the start of 2010, because RPI last July was -1.4%.
Food Prices
The main factor behind the drop in the inflation rate in July was a fall in transport costs, and in particular the prices of second-hand cars and fuel. Other factors included falls in the price of clothing and footwear. These offset rises in cost of food and non-alcoholic drinks. For example, wheat prices hit a 22-month high earlier this month after rising more than 50% since the end of June. Core inflation - which ignores volatile energy and food prices and is closely watched by economists - fell to 2.6% to 3.1%. "The numbers are broadly as expected, with some easing in the core inflation, which I think will probably please some members of the [Bank's] Monetary Policy Committee," said Stephen Lewis at Monument Securities. "But whether we are going to hold on to this better position does remain doubtful because there could be some unwinding of seasonal discounts as we move further into the autumn."
Last week, the Bank said it expected inflation to remain higher than forecast in the coming months, largely due to the rise in VAT to 20% in January. The Bank's governor, Mervyn King, said inflation was likely to fall back below the Bank's 2% target in 2012.
Source: BBC News
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