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Shock rise in UK prices

CPI annual inflation, the government’s target measure, was 4.4% in February, which was a substantial rise on the figure of 4.0% recorded in January. Most analysts had been expecting a rise, but not by as much as this. This is the highest figure since October 2008.

The main upward pressure on prices came from domestic heating costs – particularly gas, clothing and footwear, financial services and recreation and culture. There was also a rise of 0.8% in transport costs between January and February, largely driven by a 1.4% rise in petrol prices.

There was a record monthly fall in alcohol prices of 1.1% which was probably specially arranged by the chancellor to keep us all happy, while our real incomes continue to spiral down the plug hole. The recent changes in inflation can be seen in the figure below.

Source: ONS

It can also be seen that RPI inflation was 5.5% in February, up from 5.1% in January, and this measure was affected by the same factors as the CPI. Inflation in the EU stood at 2.8% in January which was much lower than the 4.0% recorded in the UK.

CPI inflation is now well over twice the government target of 2%. Will the Bank of England now make a move to raise interest rates? Higher commodity prices are still feeding through into the system and we can probably expect inflation to go even higher, with the CPI moving towards 5%. There will now be added pressure on the Bank to raise interest rates from the current 0.5%, perhaps in the early summer, in order to contain the rises.

Average earnings have been quite subdued to date, but will the trade unions orchestrate a “summer of discontent” with workers trying to re-establish the real value of their wages? With increasing unemployment on the cards, and continued government austerity, the unions are not in a strong position.

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Posted in Bank of England, Consumer Price Index, Inflation, Interest rates

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