Belfast Telegraph

Inflation eases but Bank of England misses target again

By Sean O'Grady

A dramatic fall in the price of used cars after the end of the scrappage scheme helped to push the annual rate of inflation down from 3.2 per cent in June to 3.1 per cent last month, the Office for National Statistics said.

The longer established Retail Prices Index (RPI), which includes mortgage bills, also slipped back, from an annual rate of 5 per cent to 4.8 per cent. The yearly rate of food inflation rose to 3 per cent over the month – the highest since last summer.

Relatively high inflation means that workers and savers are both suffering real-terms declines in their incomes.

Earnings growth is just 1.3 per cent per annum, while only 87 out of the 1,244 savings accounts currently available leave basic-rate taxpayers with a positive return after tax. It is virtually impossible for a higher rate taxpayer to secure a positive return on cash savings accounts.

Rail commuters in particular face a squeeze: many will be braced for fare rises of almost 6 per cent in January despite the RPI easing to 4.8 per cent in July. Most regulated rail fare increases are based on a formula of July's RPI plus 1 per cent – which would leave passengers facing rises of 5.8 per cent. Unrated fares could go up by much more.

Inflation remains more than 1 per cent in excess of the official target of 2 per cent, and the Governor of the Bank of England, Mervyn King, has had to write a further open letter to the Chancellor explaining why the Bank's Monetary Policy Committee has allowed inflation to rise so high.

In his letter, Mr King warned: "If the current period of above-target inflation were to become engrained in inflation expectations and this affected wages and prices, it would be costly to bring inflation back down again."

Analysts took some comfort in the way that "core" inflation – stripping out the effects of VAT and volatile items – has subsided. It declined from 3.1 per cent to 2.6 per cent, the lowest level since November 2009. However, in an ominous sign of stronger inflationary pressures to come from the spike in wheat and other global food prices, food and drink rose in July alone by 1 per cent, a record for this time of year.

Fares rose sharply on long-haul and domestic routes in July, by almost 10 per cent. Sterling slipped as markets took the data to imply a less rapid rise in interest rates from the Bank than might previously have been feared. The index figures themselves were in line with expectations.

Mr King repeated the view he expressed last week that special factors had pushed inflation higher, and that it would remain above target for the whole of next year. "As the effects of higher VAT, energy price rises and import price increases drop out of the 12 month comparison, inflation should fall back, probably to below the target, reflecting the influence of spare capacity in the economy," he said.

"The MPC's central view remains that inflation in the medium term is likely to be close to, or a little below, the target. That is consistent with the current low rate of pay increases, little growth in broad money and credit, generally stable inflation expectations and the most likely prospect being a muted recovery in demand that is insufficient to eliminate the margin of spare capacity in the economy.

"But how fast and how far inflation will fall are both difficult to judge, with substantial risks in both directions," Mr King said.

The Governor told the Chancellor, George Osborne, to expect further missives from Threadneedle Street.

Belfast Telegraph

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