UK inflation holds steady

The Consumer Prices Index (CPI) – an official measure of inflation was 1.8% in July. This is the same as June, which is below the Government’s 2% target.

Figures published today by the Office for National Statistics also reveal that annual inflation as measured by the Retail Prices Index (RPI) – which includes housing costs such as mortgage interest payments and council tax – was minus 1.4%, compared with minus 1.6% in June.

The report states that falling food and non-alcoholic beverages had the greatest downward influence on the CPI. This was principally due to meat and vegetable prices falling this year but rising a year ago across a range of products. There was a small downward effect from bread and cereals, where prices rose by less than a year ago.

The report also outlines a large downward pressure from restaurants and hotels where prices rose by less than they did last year. This downward effect came from restaurants and cafes, particularly relating to takeaway items, and accommodation services, where prices were little changed this year but rose a year ago.

Only recreation and culture put upward pressure on the CPI, mainly in respect of games, toys and hobbies and recording media.

Earlier this month, the Bank of England’s Monetary Policy Committee (MPC) yesterday chose to keep the base rate at 0.5% but up the cash injection made into the British economy by £50bn.

The measure, known as quantitative easing, involves creating extra money in the economy with which to buy government and corporate bonds. Such a move is intended to stimulate economic growth, which it is hoped will ultimately improve the finances of British corporations and consumers, but there is still some question as to whether it is working.

Speaking to the Guardian newspaper, James Knightley at ING said:

“UK CPI for July continues to highlight how sticky inflation is in the UK. Nonetheless, we expect inflation to slow further given import prices have already plunged from a 20% increase year on year in Q3 2008 to being negative now. Sterling has risen by around 10% from its bottom, which will depress import prices further, while the global recession is encouraging price competition.”

“This should be enough to offset some of the recent rises in petrol prices while a weak labour market should ensure that wage rate increases remain moderate and non-inflationary. Moreover, the amount of slack in the UK should weigh down on pricing power for many more months. We suspect that inflation can fall to 1% over the next few months, which suggests that the Bank of England could offer additional stimulus if the recovery proves to be more sluggish than hoped.”