Inflation surprises with jump to 3.2%
By Daniel Pimlott, Economics Reporter
Published: March 24 2009 10:13 | Last updated: March 24 2009 22:01
Fears Britain might enter a deflationary spiral receded on Tuesday after inflation rose in defiance of expectations last month.
As the sharp fall in the value of the pound fed through in the form of higher prices for shoppers, the consumer price index increased from 3 per cent in January to 3.2 per cent in the year to February, confounding economists’ forecasts of a further fall to 2.6 per cent. Inflation has fallen from a peak of 5.2 per cent in September.
The rise in inflation forced Mervyn King, the governor of the Bank of England, to write to Alistair Darling, the chancellor, to explain why prices were still rising more than one percentage point above the Bank’s 2 per cent target.
The data appear embarrassing for the Bank. It has cut interest rates to the lowest level in its 315-year history and begun an unprecedented programme to create money and to buy assets.
But Mr King said the rise in inflation reflected retailers’ decisions to pass on the fall in sterling to consumers – although he was optimistic about the medium-term implications. “Even if we see significant pass-through of the depreciation of sterling, it may mean inflation is close to the target rather than below it. I don’t see a large risk of inflation being significantly above it,” the governor told the Treasury committee on Tuesday.
The effect of higher import prices – reflecting sterling’s near-28 per cent drop in value since the summer of 2007 – seemed to be evident in some categories that made the biggest contribution to the inflation rate.
Continued sharp rises in food prices were responsible for faster-than-expected increases overall. Food inflation stood at 12.5 per cent in February, compared with 11.1 per cent in January. Within that, prices for fresh vegetables were up by 18.6 per cent, partly due to cucumbers and courgette prices rising after a poor Spanish harvest.
The cost of meat was up by 15.2 per cent. A spokesman for the British Retail Consortium said farmers were increasingly exporting meat rather than selling it in the UK because of higher prices offered abroad.
Other categories where figures showed a marked rise in inflation were games, toys and hobbies, transport costs, household appliances and clothing and footwear.
Games and toys showed a 2.5 per cent increase in prices during the month, while on an annual basis they were down by 0.1 per cent after falling by 6.4 per cent in December. Toy imports make up 85 to 90 per cent of all toys sold in the UK, according to David Ackerman, chairman of Equitoy, a trade association of toy importers.
The ONS added the rise in inflation also reflected companies increasingly deciding to reverse the value added tax cut implemented in the pre-Budget report last year. Some companies said they were reinstating prices that had prevailed before the VAT cut, as it was company policy to do so, but most said the decision reflected higher import prices, according to an ONS statistician.
Continued strength of inflation despite deepening recession made it increasingly unlikely the UK would face a prolonged period of deflation, economists said.
The broader retail price index fell to a 49-year low in February of 0 per cent. Economists had expected it to plunge to -0.7 per cent. However, that reflected sharp falls in housing costs and energy prices for households, rather than big changes in retail costs.
Longer term, an array of forces will bear down heavily on prices. Falling fuel costs will erode headline inflation.
Rising unemployment and increasingly weak international trade will also open up a gap between the capacity of the economy and level of demand, driving prices lower. As the effect of sterling’s decline disappears from the index, inflation will also fall.
“Aggregate demand is falling away rapidly,” said Ben Broadbent, an economist at Goldman Sachs. “Regardless of the exchange rate, it’s reasonable to say inflation will fall away next year.”
Economists expect that while the RPI will fall for an extended period of time – thanks to the fall in mortgage interest costs – the CPI will turn negative only briefly this autumn.
Will deflation – the concept dreaded by economists and politicians alike – at least briefly stalk the land? No, says George Buckley, an economist at Deutsche Bank. For that to happen “a sustained decline in the price of goods and services” would be required. The risk of that had now diminished.
Copyright The Financial Times Limited 2009
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Norvegia, banca centrale taglia tassi di 50 pb al 2%
mercoledì 25 marzo 2009 14:32
OSLO, 25 marzo (Reuters) - La banca centrale norvegese ha tagliato i tassi di riferimento di 50 punti base al 2%, in linea con le attese degli economisti.
Si tratta del quinto taglio da ottobre quando la banca centrale aveva iniziato a ridurre i tassi, allora al 5,75%, per far fronte a una crisi sempre più profonda.
