City surprised as inflation sticks at 1.8%

The Consumer Prices Index surprisingly held steady last month. So can we forget about deflation?

Last Updated: 31 Aug 2010

The CPI measure of inflation remained at 1.8% last month, according to the Office for National Statistics – much to the surprise of economists, who were predicting a fall to 1.5%. The broader Retail Prices Index also 'rose' to -1.4% from -1.6%, suggesting that efforts to ward off deflation are (to some extent) having the desired effect. This would be good news for the Bank of England – except it's hard to see this being anything other than a temporary reprieve...

There’s no doubt that CPI rate is proving stickier than everyone expected. Apparently computer games and DVDs saw the biggest price rises last month – presumably because recession-hit punters are staying in with the PlayStation rather than heading down to the pub. Furniture prices were also up on last year, because retailers were discounting less heavily (so either they’re feeling a bit more confident than they were this time last year, or they’ve already pared margins down to the bone). Together these offset the effect of lower food and drink prices, holding CPI at 1.8%, just below the Bank’s 2% target.

The RPI figure, which includes housing costs like mortgages and council tax, also come as a surprise. It’s still falling, but less than expected – and if you strip out the effect of lower mortgage costs, it actually inched up from 1% to 1.2%. That’s the biggest jump in a year, and it’s largely due to a recovery in house and car prices. This is good news for commuters too: annual fare rises are pegged to the July RPI figure, so next year’s travel card just got a bit cheaper.

All of which might seem a bit odd. After all, we’re in the middle of a nasty recession, with spare capacity all around; Bank of England Governor Mervyn King said only last week that he was expecting CPI inflation to dip below 1% in the coming months (hence the extra £50bn for the quantitative easing pot). So why are prices not falling faster? Well, the Government will tell you that its stimulus packages are working. And it’s it’s certainly true that the fall in the pound, which has made imports cheaper, has helped keep us spending.

However, the real answer is probably that it’s just a matter of time. Until the reversal of the VAT cut at the turn of the year, it’s hard to imagine prices going anywhere but down – particularly since oil prices will be so much lower than last year. King seems to think that it could be two years before inflation gets back above his 2% target. We’ll have to buy a lot of copies of Halo 3 to change that.

In today's bulletin:

City surprised as inflation sticks at 1.8%
Dell and Sony Ericsson aim for bite of Apple
Worst is over for property and car sales?
Directors got 65% of maximum bonus last year
Jobs at risk as Ryanair grounds 90% of its Manchester flights

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