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Economy

UK inflation 'yesterdays story'

Written by Gary Howes
Tuesday, 18 November 2008
Month-on-month inflation falls for first time since 2001. Related Articles Basis point rate cut called for Inflation near 6 percent PwC calls for drastic rate cut Savings level warning The Office of Nationals Statistics (ONS) have revealed that month on month inflation has fallen for the first time since Novemeber 2001. The new statistics show that the impacts of the UK economic slowdown are starting to take their toll as the economy cools. It is good news for under pressure consumers who have over the past summer faced record levels of inflation. However now the worry is that if the trend continues the UK could enter a period of deflation, something that will weigh on the minds of the decision makers at the Bank of England who are expected to cut rates to below the current 3%. Closer look at inflation figures "The figures released today confirm our long-held view that inflation is yesterday’s story, and that the wait-and-see approach by the Monetary Policy Committee went on for far too long", comments Ben Read, Managing Economist in CEBR Figures released today show that inflation fell in October from its September peak. The annual rate of growth in consumer prices fell significantly to 4.5 per cent from 5.2 per cent in September. Whilst the fall was larger than market expectations it shouldn’t come as too big a shock as we saw a large increase in inflation one year ago in October 2007. Perhaps more interestingly, month-on-month CPI inflation fell by 0.2 per cent – the first month-on-month fall since November 2001 if you ignore the impact of January and summer sales. By far the biggest contributor to the monthly fall was transportation costs, which contributed over 70 per cent of the decline in inflation. Petrol pump prices have fallen significantly from their summer peaks of £1.19 per litre of unleaded petrol, and now stand at around 95 pence per litre. Oil now stands at around $53 per barrel, over 60 per cent down on its summer high, and whilst much of this falling oil price is still to be passed through to pump prices and energy bills, it is starting to have an effect. Food and non-alcoholic beverages also showed a large decline in annual inflation, falling to 10.1 per cent from 11.3 per cent in September. However perhaps surprisingly food and non-alcoholic beverages showed a marginal increase in prices between September and October of 0.4 per cent. Figures also show that the all-prices measure of RPI remained below CPI in October, with RPI falling from 5.0 per cent to 4.2 per cent. The reason that RPI remains below CPI is that mortgage interest payments fell 2.8 per cent year-on-year to October. The recent 150 basis points cut in interest rates will no doubt widen this gap in months to come. The figures released today confirm our long-held view that inflation is yesterday’s story, and that the wait-and-see approach by the Monetary Policy Committee went on for far too long. It now seems that there is a strong likelihood of deflation, and further bold steps may be needed both from the MPC and government to avoid this becoming a sustained period of deflation which could lead to a damaging downward spiral. It would be no surprise if we saw another large cut in base rates in December, although the MPC may hold off until the new year after assessing the impact of its unprecedented cut earlier this month.