The Office for National Statistics this morning revealed the latest set of monthly price inflation data, with the Consumer Price Index recording a 4.4% increase year-on-year in July, up from 4.2% the month before, while the Retail Price Index remained at an annual pace of 5% last month. Once again the CPI measure is notably higher than the Bank of England's target rate of 2%; here's what two of the U.K.'s experts--economists from Schroders and the Centre for Economic and Business Research--have to say on the figures:
Schroders European Economist Azad Zangana
U.K. Inflation Rises Again: U.K. inflation based on the consumer price index (CPI) jumped to an annual rate of 4.4% in July from 4.2% in June, making this the 20th month CPI inflation has been above the Bank of England’s 2% target. The results will disappoint the majority of economists, who had a consensus estimate of 4.3% (Schroders 4.5%). Excluding energy, food, and alcoholic beverages, core prices inflation rose from the annual rate of 2.8% to 3.1%. Meanwhile, the alternative measure based on the retail price index (RPI) remained unchanged at 5%.
Within the details, this month’s upside surprise to consensus estimates reverses the downside surprise seen last month caused by the early start to the summer sales. In addition to the seasonal factor, housing and household services inflation is currently elevated as the cost of social housing and rents has risen faster than normal. Higher rents reflects the higher demand for rental properties as new households not only struggle to get a foothold on the property ladder, but may also be choosing not to commit to buying a property due to the uncertain economic environment.
The other major contributor to the annual inflation rate in July is cost of transport, as the higher price of oil feeds through to the cost of public transport. Commuters today will be disappointed to learn that rail fares are set to rise by as much as 13% from January (3% on top of the July RPI figure of 5%, plus an additional 5% for some routes), which is bound to squeeze the disposable income of consumers.
Overall, this month’s numbers are not as important as next month’s numbers, which will include the first set of gas and electricity prices that have been announced over the summer. We expect the rise in energy prices to push up CPI inflation to close to 5% for August, and beyond that later in the year. Despite this, we expect the Bank of England to continue to disregard the rise in inflation and keep interest rates on hold until 2013. The Bank of England has set out its belief that weakness of the economy will bring inflation back to target over the medium term. We are not convinced.
Centre for Economics and Business Research Economist Rob Harbron
Inflation Rises Further Above Target But Growth Concerns Predominate: The largest contributor to the change in the annual rate of inflation came from financial services, including the arrangement of mortgages--where fees rose this year after falling last year. Meanwhile the most significant negative impact to the change in the annual rate came from food & non-alcoholic beverages as the cost of foodstuffs rose less quickly in July this year than in the same period a year ago. The main driver of the overall headline rate continues to be the price of transport, in particular fuels and air fares.
The latest economic data continue to pose a dilemma for the Monetary Policy Committee. Output growth remains weak at 0.2% quarter on quarter in Q2, including a contraction in the manufacturing sector, while early figures from Q3, including the CIPS/Markit Purchasing Manager Index for manufacturing, suggest this decline is likely to continue. These data contrast with the rate of inflation continuing to soar far above the Bank of England’s target rate.
However, the bottom line is that consumers are facing substantial erosions in real disposable income in 2011. As such, economic recovery is unlikely to firm up significantly this year. As Cebr expects inflation to start to come down in 2012 as the effect of the VAT rise falls out of the annual comparison and commodity prices cool, the Bank of England has good reason for maintaining its current stance until at least Q2 2012.
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