Inflation busts 3% as cost of transport soars

Inflation is up 0.6% to 3.4% - but it's energy prices rather than growth driving it.

Last Updated: 31 Aug 2010

According to the latest figures from the ONS, the Consumer Price Index (the one that doesn’t include mortgage payments) rose 0.6% to break the 3% barrier in March – the index is now 3.4% higher than it was this time last year. And that’s the good news – the alternative inflation measure, the old Retail Price Index (which does include mortgage payments) is up even further, to 4.4%. 

While glass half-full types would like to be able to take this news as a sign of renewed economic vigour – rising inflationary pressure is an inevitable consequence of a recovering economy after all – it’s pretty hard to be upbeat.

That’s because the main driver of inflation is not a healthy boost in economic output but rising energy costs. The cost of transportation – the price of rail, air and road travel – is rising at a whopping 11%, thanks largely to the cost of fuel. Petrol is 120p a litre, partly because of rising global demand for oil and partly because of the weak pound – oil is traded in dollars, of course.

Looking on the eco-upside, the high petrol price does seem to be persuading some people to leave the car at home, as the volume sold at the pump is falling for the first time in years.

The continuing impact of VAT back at 17.5% and food price rises due to the hard winter also played their part in the inflation rise. Looks like Bank of England Governor Mervyn King is going to have to write another letter to Alastair Darling explaining why it has happened. Although King’s real headache is not the Chancellor but the fact that the Bank’s own predictions – which have inflation heading back to the 2% target by the second quarter – now look to be so wide of the mark. 

Whatever the reason, the return of inflation is unwelcome for business and consumers. With demand so fragile, putting prices up isn’t an option for many businesses just now, and rises in the cost of living are particularly unwelcome at a time when pay freezes are still in place for many employees.

It also brings closer the inevitable day when the year-long spell of record low interest rates must come to a close. With the base rate at 0.5% since March last year there’s only one way to go, and if inflation really is back to stay then rates should rise sooner rather than later.

It all goes to prove the old adage that recovery is almost more dangerous than recession. Timing is all – raise the base rate too soon and you risk killing growth, to late and a painful spike in inflation is almost inevitable.

Good job there are no major political upheavals – like a general election - around the corner to distract everyone from the task in hand, then…Doh!


In today's bulletin:

Inflation busts 3% as cost of transport soars
10.1% profit eruption as Tesco puts in seismic performance
Primark still looking sharp
IoD calls for £80bn red tape bonfire
MT Expert: How to stay grounded in a growth spurt

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