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Inflation starts to slow

The Consumer Prices Index (CPI) fell to 5.0% in October from 5.2% in September. The largest downward pressures to the change in CPI annual inflation between September and October came from falls in the cost of food (due to significant and widespread discounting by supermarkets and good harvests for certain produce), air fares and petrol.

Inflation has finally begun to slow down

But working in the other direction the largest upward pressures to the change in CPI annual inflation between September and October came from increases in the cost of clothing, electricity and gas. Changes in CPI inflation over the past two years can be seen in the graphic below.

CPI: Percentage change over 12 months

Source: ONS

There was also a fall in the Retail Prices Index (RPI), which includes mortgage interest payments, to 5.4% in October from 5.6% in September.

A Treasury spokesperson was quoted as saying: “These are difficult times for households as prices continue to be affected by conditions in the global oil and gas markets.” However, they failed to remind us that the government is planning to raise fuel duty by 3p a litre in January, which is going to put even more pressure on households.

In fact, anecdotal evidence was produced on Radio Five Live this morning showing that many motorists were now spending 20-25% of their income on petrol – with people living in rural areas and those with the longest commutes to work being hardest hit. There is also evidence that fuel tax revenues are falling due to the fact that the rising price of petrol has caused many to reduce the number of discretionary journeys which they make. Another hike in duty will only add to this problem for the Treasury.

Although inflation has started to fall, we must still remember that prices have actually risen again last month, and by a substantial amount more than the rise in average earnings. This is continuing to put a brake on consumer spending and will result in a smaller contribution to economic growth.

The CPI also remains substantially above the Monetary Policy Committee’s target of 2.0%, although the Bank of England has always maintained that the inflation rate will start to drop substantially next year. This is partly because the VAT rate was raised from 17.5% to 20.0% on 4th January 2011, and this will start to drop out of the equation from the beginning of next year.

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Posted in Consumer Price Index, Inflation

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