Retail Price Index (RPI) inflation dropped to 3.9 per cent in January, down from 4.8 per cent in December. The sharp fall was largely the consequence of the January 2011 rise in VAT falling out of the annual measure. In addition the price of petrol rose very little this year compared with a big rise in January 2011.
The Consumer Prices Index (CPI) measure of inflation dropped back in January 2012 to 3.6 per cent, down from 4.2 per cent in December. The impact of the VAT rise dropping out of the measure was key to this fall.
On both measures the month-on-month comparison showed some small reductions in the prices of clothing, footwear and furniture, from the January sales. The prices of alcohol, household services and health rose slightly.
The fact that CPI inflation is still so far above the 2 per cent target meant that the Governor of the Bank of England, Mervyn King, was obliged to write a letter to the Chancellor, George Osborne, explaining why the rate was 1.6 per cent above the 2 per cent objective. The Governor said that the Monetary Policy Committee’s ‘best collective judgement is that CPI inflation will continue to fall back to around the target by the end of 2012. In coming months, that further moderation is likely to reflect the declining contributions from petrol prices and any remaining VAT impact, together with recently announced cuts to domestic energy prices.’
He added: ‘But the pace and extent of the fall in inflation remain highly uncertain. Key factors include the degree to which slack in the labour market restrains wages, and the rate at which firms rebuild their profit margins. Any further external price shocks, precipitated for example by heightened tensions in oil exporting countries, could also have a material impact on the inflation outlook.’
Having seen inflation at or above 5 per cent over the past two years it will be very welcome to see the rate drop back to 2.5 or even 2 per cent over 2012. It may well be that pay settlements match or go beyond that level with a private sector median increase in January 2012 at 3 per cent. Some convergence of pay rises and inflation around 2.5 to 3 per cent might mean households beginning to see the prospect of rebuilding their purchasing power.
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8 March 2012 at 14:03
Rafael
I think CPI may well increase even with isrecaning unemployment.Since early ’90s debt has had a tendency to transfer from business and government to the private household. The debt taken on by the private household has largely been placed into existing housing. Existing housing was taken out of the CPI so it does not show up in inflation.Now it seems that private household debt has to an extent saturated. As such I am expecting a shift of take up debt to shift more to business and government.Banks. ANZ bank man talked recently about bank loan books being 2/3 residential housing and 1/3 business lending. He stated that there was interest in shifting to more lending to the business sector.The government over this long period have also had a period of paying off debts. There has been a situation where they have not spent much money on infrastructure. Now they seem to have a lot of money planned for capital investment. A lot of infrastructure is in the state of requiring both major plant replacements and capacity increases. Evidenced by huge increases in utility rates, e.g. water/electricity/gas/&c..My thinking behind CPI isrecaning is that households take on debt to primarily to spend on existing housing which does not show up in the CPI. Businesses borrow money to spend on investment in plant and other such spending which does show in CPI. The government also will be spending more money (whether borrowed or taxed) on major plant and other items which will show up in CPI. Hence, I believe that CPI will increase regardless of most other factors.This raises a large concern of mine that even if there is an increase in unemployment there may be the perverse situation where the economy is weak but interest rates may rise.