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CPI inflation drops to 1.6%

The government’s target measure for inflation, the Consumer Prices Index (CPI) fell from 1.8% in July to 1.6% in August. This was its lowest level since February 2005. The Bank of England aims to keep this measure of inflation within one percentage point of a 2% target rate.

 

The largest downward pressure affecting the CPI rate came from housing and household services. However, the largest overall effect came from gas prices which were relatively stable since last month, but had risen significantly a year ago. A similar situation was also seen in electricity prices.

 

There was also a large downward pressure from food and non-alcoholic drinks, with prices falling at their fastest rate in a July-August period since 2000. This compares to a price rise of 1.4% a year ago.

 

The latest inflation figures can be seen in the graphic below.

Annual Inflation Rates - 12 month percentage change. Source:ONS

Annual Inflation Rates - 12 month percentage change. Source:ONS

 

The largest upward contribution to the CPI rate came from transport. This is because prices rose for fuel and lubricants between July and August, but fell during the same period last year at the fastest rate ever recorded for this period. The average price of petrol rose by 1.1 pence per litre between July and August this year, to reach 103.8 pence, compared with a fall of 5.5 pence over the same month last year.

 

The Retail Prices Index (RPI), which includes mortgage interest payments and housing costs, stayed in negative territory whilst rising slightly from -1.4% in July to -1.3% in August. The same factors affected both the CPI and the RPI but the one difference was the methods used to measure the price of new cars which resulted in a larger upward pressure in the RPI.

 

RPIX inflation, which is the RPI excluding mortgage interest payments, was 1.4% in August, reflecting a rise from 1.2% in July.

 

Although the main measure of inflation is falling in the UK we are still showing higher price rises than the rest of the EU. The latest comparable figures show a CPI in July of 1.8% in the UK as opposed to a provisional figure for the whole of the EU of only 0.2%.

 

But what can we expect over the coming months?  Last week, Mervyn King, Governor of the Bank of England, told a Treasury Select Committee that inflation is likely to be volatile over the next six months. He forecast that inflation would fall further below the 2% target before rising above it. He said: “That volatility reflects base effects as well as the reversal of last year’s VAT cut.”

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Posted in Bank of England, European Union, Inflation

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