Connected Research

Union policy research in the 21st century

Further fall in UK inflation

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National Statistics published new figures for inflation today – and they show similar trends to previous months: the annual rate of change in the Retail Price Index fell further, to -1.6% where it really is in uncharted territory, at least in post-war times.

There were also declines in the Consumer Price Index – the government’s preferred measure of the level of prices and the one forming the basis of the Bank of England’s monetary policy – and in RPI-X. Over the last two years, the following chart compares the three measures on the basis of the monthly figures:


All the measures are based on the same price collection date, but CPI (and RPI-X) exclude, among others, a series of data relating to housing costs particularly in the owner-occupier sector (i.e. mortgage interest payments, house depreciation and buildings insurance). RPI is also based on an arithmetical mean of the individual price rises, whereas CPI is based on the geometric mean – a measure apparently more appropriate to annual growths in figures over time.

Focusing on RPI, the largest downwards contribution came from housing, where prices fell by 11.6% on the year stemming from mortgage interest payments and house price depreciation. Motoring also saw lower prices, with a drop of 4.6% over the year principally due to a fall in the price of petrol and oil.

The group of items making the largest upwards contribution on the overall figure was food, where prices overall rose by 5.3%, with higher price rises recorded against processed fish, sugar, lamb, pork, coffee and processed fruit. Nevertheless, the fuel and light group saw prices rise overall by 9.6% over the year, with gas prices rising by 24% and electricity prices by 6.8%. This group saw the largest increase in prices of the fourteen that make up the RPI (but it has an overall lower weight in the overall index than food).

Meanwhile, the Bank of England is convinced that its £125bn quantitative easing programme, which the Monetary Policy Committee at its monthly meeting last week chose not to increase, is ‘heading in the right direction’ according to its Deputy Governor, Charlie Bean, whose remit covers monetary policy. The Bank continues to believe that it is still far too early to evaluate the effects of the programme, which could take nine months fully to work through the system, but is, however, concerned (based on the Japanese example) not to withdraw the programme too early, thereby nipping recovery in the bud, while not doing so too slowly and ‘letting the inflationary cat out of the bag’. The Bank has spent £112bn so far and expects to complete the programme to the limits of its existing political authority next month.

The decision last week not to increase the programme led to short-term sharp rises in long-term gilt yields – key to the valuation of pension scheme liabilities – although these have now fallen back on the grounds that the Bank may not, after all, have yet finished with the quantitative easing programme. Nevertheless, according to the Pension Protection Fund’s July update of its PPF7800 Index, assessing the overall health of UK pension schemes, 10-year gilt yields are on a rising trend albeit well off their June 2007 peak.


Written by Calvin

14/07/2009 at 2:31 pm

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