Latest UK Inflation

inflation-latest

Inflation in the UK remains relatively high given the state of the economy. It continues to be above the Bank of England’s target of 1-3%. However, the MPC will not be overly concerned about inflation. They are more worried about the weak prospects for economic growth and will be ‘hoping’ / predicting inflation will continue to slowly fall throughout 2012.

  • The difference between CPI – RPI
  • CPI consumer price index
  • RPI – includes mortgage interest payments and other housing costs not in CPI.
  • CPI-CT – excludes the effect of taxes (e.g. VAT)

The gap between CPI, CPI-CT and RPI has recently narrowed. This is due to expiration of tax increases and interest rates have been stable.

Why is Inflation still above target given spare capacity in the economy?

Commodity Prices. There is still some impact of past increases in oil prices and other commodities. Though the March CPI figures were helped by a fall in petrol prices. Yet, the price of petrol remains quite volatile, reaching another recent peak during April. This renewed price of petrol means CPI inflation may fall by less than Bank of England predicts throughout 2012.  Yet, with the global slowdown, oil prices are again forecast to fall over coming weeks.

The ONS state that the biggest upward factors in UK inflation are currently in food, clothing, recreation and culture.

Wage inflation

Due to weak economic growth and continued high unemployment, wage growth continues to remain weak. This means many  consumers are seeing a continued fall in real incomes. The Bank of England think this is a significant factor in depressing future inflation.

realwages

Spare Capacity

Given prolonged low growth, there is a substantial negative output gap. With unsold goods, this tends to depress prices. However, there is evidence that firms have less spare capacity than you might expect. In other words the potential output has fallen below the long run trend rate meaning there is less surplus capacity than you might expect.

RPIX – same as RPI since interest rates have been constant.

Related

Latest inflation report at Bank of England

Inflation at ONS

3 thoughts on “Latest UK Inflation

  1. These latest graphs are most enlightening – with UK’s ” quantitative easing ” and Obama’s TARPS, and now the G20, IMF & World Bank injecting $ 430 B into the World’s Economy after bailing out PIIGS for the second time – isn’t it a bit rich that we work for a living, and provide for our families, are taxed when ” fiat ” dollars and Euro’s can flood the market willy-nilly ? Any Economist will tell you that inflation eats into savings and retirement funds above 3 %, but the new paradigm appears quite different. Missing some thing ?
    What became of the UK’s latest sovereign Gilts ( electronically tweaked on a mouse ) which pays only 75% on maturity, and with the same ‘ monopoly ‘, funny money which adds to spiralling cost, as inflation takes it’s toll on my retirement nest egg, which incidentily had already lost 17 % 2008-12.
    Good luck on your Olympic Games & the Golden Jubilee Celebrations.
    Isn’t it odd that people work and save and do without luxuries, whilst the Govt of the Day, can create billions, at a flick of a mouse !
    Amazing. Back to the learning curve, it seems.

  2. Very nice analysis. It helps me quite a lot with my A2 exam coming up, they’re gonna ask many question into the UK Inflation
    Thanks so much Tejvan 🙂

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