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Investment News Price Pressures Continue Despite Inflation Fall 18471603

Price pressures continue despite inflation fall
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Price pressures continue despite inflation fall

13 April 2011 / by Paul Dicken

Inflation in March fell back to four per cent from its 4.40 per cent level in February, prompting predictions that the Bank of England may delay raising interest rates until later in the year.

The combination of weak UK economic growth and high inflation has presented the Bank with a dilemma about raising rates from the current 0.50 per cent level, so any fall back in the trend of rising inflation could lead to the Bank continuing to delay raising rates.

Everyday inflation higher

The official Consumer Prices Index (CPI) inflation rate is still significantly higher than the target of two per cent, and many organisations say individuals are being hit harder by price increases than the four per cent figure suggests.

Analysis of a basket of prices for everyday costs – around 60 per cent of what is used to calculate CPI inflation –  by accountants PriceWaterhouseCoopers, which they term ‘everyday inflation’, suggests a rate of inflation of 5.10 per cent in March, with global oil prices continuing to increase.

Chief economist at Pwc, John Hawksworth, said there had been a ‘large and persistent’ difference in everyday inflation over the past decade, reflecting marked rises in global food and energy prices, both of which impact the regular spending of households.

“In contrast, the prices of more occasional consumer purchases such as cars, TVs, electrical appliances and clothing have tended to rise less fast on average, so holding down the headline CPI inflation rate. This latter factor represents a real gain to consumers, but not one that they may appreciate fully due to greater awareness of price trends for more regular purchases as captured by our everyday inflation index,” he said.

On 12 April, the ONS said the largest downward pressure came from food and non-alcoholic drinks mainly due to supermarket-led sales, other areas where prices were rising less quickly or putting downward pressure on the CPI rate were games and toys, and air transport.

Interest rate and inflation outlook

European economist at the asset manager Schroders, Azad Zangana, said economists and financial markets had been surprised by the size of the fall in the CPI rate.

“With surging commodity prices but a fragile domestic recovery, the Bank of England is facing the eternal challenge of correctly timing its policy shift,” he said, with markets pushing back expectations of a rise in interest rates.

Despite the cut in petrol and diesel duty announced in the budget, Zangana, said the price of energy rose 1.8 per cent in March, taking the annual rate to 10.1 per cent, with the upward pressure from commodity prices starting to be felt in other sectors of the UK economy.

Currency exchange specialist Travelex said inflation remained a key concern for UK importers and exporters, with the company’s confidence index finding that three in five importers and exporters thought rising inflation was damaging their business and impacting competitiveness.

However, David Sear Global Managing Director at Travelex Global Business Payments said trade figures were showing growth in exports and falls in imports supporting hopes of an ‘export-led recovery’ in the economy.

© Fair Investment Company Ltd

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