Belfast Telegraph

Saturday 23 August 2014

Inflation slightly down to 2.7%

Bank of England governor Mark Carney. If inflation fails to come down as expected, it could hit his plans for interest rates.

Inflation eased back to 2.7% in August as retailers kept a lid on the prices of new autumn ranges while petrol pump rises slowed, official figures showed today.

The fall in the Consumer Price Index (CPI) from an annual rate of 2.8% in July was also spurred by a lower rise in air fares than last year, according to the Office for National Statistics.

Figures showed a month-on-month increase of 0.4%, which was the lowest August rise since 2009.

But the retail price index, a separate measure calculated in a different way, rose from 3.1% to 3.3%.

The fall in the CPI rate came as clothing and footwear inflation came in at 2%, compared to 2.8% last year, at a time of year when retailers are introducing new full-price autumn ranges.

Meanwhile, petrol prices rose 2p per litre compared to a rise of 3.5p per litre in the same month last year, mirroring movements in oil prices.

Air fares were up 9.4% compared to 10.2% a year ago, with the main downward effect coming from domestic routes.

Upward contributions to CPI came from furniture and furnishings, major appliances and small electrical goods such as fans.

Annual inflation for food and non-alcoholic beverages rose to 4.1% from 3.9% while there were also higher prices for games, toys and hobbies, adding to the pressure on hard-pressed families as wage rises still lag behind the cost of living increases.

Recently introduced experimental measures of inflation such as CPIH, which includes housing costs, and RPIJ, created to iron out the gap formed by the different methods of calculating the price of goods, stood at 2.5% and 2.6%, unchanged from July.

The Treasury said: "The economy is turning a corner, but the recovery is in its early stages and risks remain.

"The only way to deliver a sustained improvement in living standards is to tackle the economy's problems head on and deliver a recovery that works for all."

Policymakers have been forced to tolerate above-target inflation as they keep interest rates low to try to nurse the recovery back to health.

But Bank of England governor Mark Carney has pledged that if it looks set to rise to 2.5% on an 18-month to two-year horizon, the Bank could move to raise rates.

The condition was set out in the details of the Bank's flagship "forward guidance" pledge by the Monetary Policy Committee (MPC) to keep interest rates at 0.5% until unemployment falls to 7%.

Samuel Tombs of Capital Economics said weak output prices and past movements in commodities suggested inflation had further to fall.

"We continue to think that CPI inflation is likely to fall back to the 2% target within the next few months - a development that would help to ease the squeeze on households' real earnings and cool fears in the markets that one of the inflation knockouts to the MPC's forward guidance is likely to be breached."

Peter Tutton, head of policy at StepChange Debt Charity, said: "Today's figures offer little relief to the millions of British households who continue to see the basic cost of living becoming increasingly difficult to meet.

"A fall in inflation is welcome, but while wage growth remains anaemic family budgets will be increasingly stretched by spiralling living costs, leaving many vulnerable to debt."

Shadow Treasury minister Cathy Jamieson said: "With prices still rising much faster than wages, the cost of living crisis under David Cameron continues.

"After three damaging years of flatlining, working people are worse off by almost £1,500 a year under this Tory-led Government. But rather than helping ordinary families, David Cameron is so out of touch he has given a huge tax cut to millionaires instead.

"We need action now to help people struggling with the rising cost of living. That's why Labour is calling for a lower 10p starting rate of tax to help millions on middle and low incomes and action to tackle soaring energy bills - not a tax cut for millionaires."

The small drop in CPI inflation gave little cheer to savers, with low interest rates meaning they are still struggling to earn enough to keep up with the rise in the cost of living.

Experts at Moneyfacts said that just three out of 840 savings accounts, including ISAs, offered interest rates high enough to negate the effects of tax and inflation.

Moneyfacts editor Sylvia Waycot said: "Inflation may have fallen but it is still high enough to ruin the spending power of any feeble interest paid on today's savings accounts, which leaves the elderly reliant on savings income and the young saving for a house deposit high and dry."

The Federation of Small Businesses (FSB) voiced concern about the rise in RPI - which is no longer classed as an official national statistic - as next month's measure will be used to determine business rate increases for 2014.

FSB chairman John Allan said: "Last year the Government agreed to review the inconsistent use of RPI which traditionally results in higher business rates bills for businesses,and the FSB would like the Government to fulfil this commitment as a matter of urgency."

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