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Big fall in CPI inflation

The Consumer Price Index (CPI) measure of annual inflation fell to 1.1% in September from 1.6% in August. This was its lowest level since September 2004. Given the remit to the Bank of England to keep inflation within 1% of the 2% target, this means that a further fall in inflation may well require the governor of the Bank to write a letter to the Chancellor explaining why inflation is outside the boundary set.

 

The extent of the fall was rather surprising but was mainly due to gas and electricity bills which were unchanged between August and September this year but had risen a year ago. There was also downward pressure on prices from food and non-alcoholic drinks which fell by 0.9% between August and September. Other downward effects came from restaurants and hotels and DVDs.

Electricity and gas bills were the main influence on the fall in CPI

Electricity and gas bills were the main influence on the fall in CPI

 

The biggest upward pressure on price was from transport, with the average price of petrol rising by 2.4p per litre, compared to a fall of 2.3p a year ago. There was also upward pressure from second hand car prices. If oil prices continue to rise there is a possibility that the CPI may rise in the months ahead, especially with VAT being pushed back up to 17.5% from its temporary 15% figure, in January.

 

In the year to September, RPI annual inflation fell by 1.4% compared with a 1.3% fall in August. This measure was also affected by the main changes in the CPI components, although a different method used to measure the price of new cars in the RPI resulted in a larger upward contribution.

 

The RPIX measure, which is RPI excluding mortgage interest rate, was 1.3% in September compared with 1.4% in August.

 

Compared to the eurozone UK CPI remains high. The latest flash estimate for the eurozone for September shows a figure of -0.3% compared to +1.1% in the UK.

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