UK inflation rate declines to 3%

IveSeenTheLight

UK inflation rate declines to 3%


A fall in petrol prices contributed to the fall in inflation


Consumer Prices Index (CPI) inflation fell slightly in January to 3%, from 3.1% in December, figures have shown.
CPI inflation has now fallen for four months in a row from a high of 5.2% in September, driven down by falls in energy costs and fuel prices.
Retail Prices Index (RPI) inflation, which includes mortgage costs and is often used in pay negotiations, fell to 0.1% from December's 0.9%.
The drop in RPI may lead to pressure on employers to limit pay rises.
'Extraordinary occurrence'
The headline RPI rate of 0.1% is the lowest rate it has been since 1960.
In addition to falling energy prices, the reduction in VAT from 17.5% to 15%, announced in the pre-Budget report in November, also had an effect.



The low level of RPI inflation could lead to some tricky wage negotiations.
"A zero or negative RPI could result in the extraordinary occurrence of average pay increases also falling towards zero," said John Philpott at the Chartered Institute of Personnel and Development.
In light of the current strain on government finances, Mr Philpott called for a freeze on public sector pay.
David Page, an economist at Investec, said wage growth would slow "quite markedly" this year.
However, he added: "It will be very hard for firms to push through wages growth at a lower level than 1% or 2%."
'Very disappointing'
The modest decline in CPI was less than expected - the consensus forecast among analysts had been for an annual rate of 2.7%.
The falls in energy bills were slightly offset by rises in the price of household equipment, such as furniture, and alcohol, clothing and footwear.
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The smaller-than-expected drop was also due in part to a reluctance by retailers to slash prices further after heavy discounting in December.
Jonathan Loynes at Capital Economics described the modest decline as a "temporary aberration reflecting the partial reversal of some very aggressive price discounting in December".
One of the reasons why the Bank of England delayed cutting interest rates last year was concern over inflationary pressures in the economy.
The bank has already cut interest rates to 1% in an attempt to stimulate the economy.
It believes that CPI inflation will drop to 0.5% this year and will remain below its 2% target for two years.
Deflation
Others believe that core inflation could become negative this year, a situation known as deflation.
In the short term, this can provide a boost to the economy by increasing consumers' spending power, but in the longer term it can cause serious economic problems.
This is because consumers postpone spending as prices fall, which reduces companies' revenues.
If the economy does experience deflation, RPI, which stands at just 0.1%, is likely to become negative first.
"Next month, we'll see that measure move into deflation," said Ross Walker at RBS. Many analysts expect the Bank of England to cut the Bank Rate by a further half percentage point in March to 0.5%. However, with little scope for further rate cuts, the Bank is also expected to pursue a policy of quantitative easing, where it increases the supply of money into the economy.



http://news.bbc.co.uk/1/hi/business/7893873.stm

Radiantsoul

I am never really convinced that deflation is bad because it might discourage consumers from buying now. Inflation is imperfect as quality of goods often improves and with most high tec goods it seems to be the case it is always the case that it "better" to buy in six months time when there is a new model or prices have fallen. Yet people do still buy. Presumably in non-luxury or pershable goods the effect will be even smaller.

dealsearcher

Can't see how purchasing a TV or car can be counted in the same way as food. You buy bread every day but TV's and cars maybe once every 5 years. It's interesting that most of the items coming down in price are in the category that you buy every 5 years or so but the items going up in price are in the category that you buy every day.

Kev09

IveSeenTheLight wrote: »

UK inflation rate declines to 3%


A fall in petrol prices contributed to the fall in inflation


Consumer Prices Index (CPI) inflation fell slightly in January to 3%, from 3.1% in December, figures have shown.
CPI inflation has now fallen for four months in a row from a high of 5.2% in September, driven down by falls in energy costs and fuel prices.
Retail Prices Index (RPI) inflation, which includes mortgage costs and is often used in pay negotiations, fell to 0.1% from December's 0.9%.
The drop in RPI may lead to pressure on employers to limit pay rises.
'Extraordinary occurrence'
The headline RPI rate of 0.1% is the lowest rate it has been since 1960.
In addition to falling energy prices, the reduction in VAT from 17.5% to 15%, announced in the pre-Budget report in November, also had an effect.

look at that RPI graph! anyone up for a bit of sledging! Deflation here we come!!!

Graham_Devon

I'd love to know where these falls in energy costs are that the BBC keep talking about.

Personally, I'm pretty sure the falls are to do with the fact were all spending a hell of a lot less!

oldMcDonald

When they say a fall in petrol, do they mean a fall in petrol or a fall in fuel in general? I buy diesel and the cost is moving upwards a penny every other day in my area. I am watching it go back over a pound again. I don't pay much attention to the price of unleaded as I don't use it - is it still falling in price as the article above states?

mewbie_2

dealsearcher wrote: »

Can't see how purchasing a TV or car can be counted in the same way as food. You buy bread every day but TV's and cars maybe once every 5 years. It's interesting that most of the items coming down in price are in the category that you buy every 5 years or so but the items going up in price are in the category that you buy every day.

Absolutely 100% agree. Measure inflation as it applies to the poorer end of society and let's have a true figure. Who cares if the rich can afford a new plasma whatever? Unfair measurement in an unfair world.

saver2000

Last year (when RPI was quite high) public sector workers were told pay increases had to be kept low to prevent inflation.

Now it has to be kept low to prevent deflation... Huh?

I would guess RPI is low because it includes mortgage payments, caused by the BOE dropping the interest rate. CPI is still over target and has been for a while, and that's supposed to be what the BOE uses now.

dealsearcher

mewbie wrote: »

Absolutely 100% agree. Measure inflation as it applies to the poorer end of society and let's have a true figure. Who cares if the rich can afford a new plasma whatever? Unfair measurement in an unfair world.

Even the rich don't buy a plasma TV every day.

Heyman_2

Come to think of it, why ARE fuel prices at the pump on the rise again? I thought oil had dropped to well under $50 a barrel?

Wookster

Heyman wrote: »

Come to think of it, why ARE fuel prices at the pump on the rise again? I thought oil had dropped to well under $50 a barrel?

That's down to the depreciating pound. It is a taste of things to come.

I suspect that we are likely to see imported items (read consumables like foods and some big ticket items such as cars, TVs etc) continue to rise in price as the devaluing pound feeds through to prices. Should QE be implemented the inflatory effect will be enhanced through a combination of more money in chasing the same goods and further devaluation of the pound.

All the above will do is squeeze consumer disposable incomes, meaning people have less and less to spend on assets, further deflating asset prices.

Only time will tell what prices do long term though...