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UK out of step on inflation

Consumer prices in the OECD area rose by 0.9% in the year to March 2009, according to figures released yesterday. This represents a continued fall when compared with the 1.3% price level recorded in the year to February. When taken on a month-by-month basis prices rose by 0.3% in March following a rise of 0.4% in February. The recent trend can be seen in the graphic below.

 

In the euro area prices were up by 0.6% in the year to March. When looking at specific countries the latest figures show increases of 1.2% in Italy and Canada, 0.5% in Germany and 0.3% in France. However, prices in the US decreased by 0.4% in the year to March and also fell in Japan by 0.3%. How then do we account for the fact that the latest CPI figure for the UK in March shows a rise in prices of 2.9%?

 

At least part of the answer stems from food prices. The OECD noted that prices for food in the OECD areas were up by 4.5% in the year to March and excluding food and energy consumer prices rose by 1.8% in the year to March 2009. However, food price inflation is running at a higher level in the UK than in any other OECD country except Iceland and Korea. The current year-on-year figure for the UK is given as 10.5%.

Soource: OECD

Soource: OECD

 

Why such a high figure? This is partly due to the steep and rapid drop in the value of sterling which has fallen over 25% in the past year. Much of our food is imported and this fall in sterling raises the price of UK food imports. There is also some evidence that domestic food producers have been raising prices to take advantage of the higher costs of imported food. There are signs in recent months that the fall in sterling against other major currencies has stabilised and if sterling continues to pick up in value it should follow through into a lower CPI inflation figure in the months ahead.

 

 

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Posted in Deflation, Inflation, OECD, sterling

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