Food and non-alcoholic drinks were ‘by far the largest downward pressure to the change in CPI inflation’, according to the ONS. The overall fall of 1.4% was a record for the February to March period – driven principally by record falls in fruit prices (down 4.7%) and bread/ cereal prices (down 2.6%), as supermarkets slashed prices to get the punters spending. Elsewhere, the price of computer games, toys and hobbies also rose more slowly, as did air fares – whereas electricity and gas bills, you’ll be delighted to hear, were higher than a year ago.
Today’s news will go down well both in the Treasury and, particularly, at the Bank of England, since the Monetary Policy Committee has come under increasing fire for its failure to curb rampant inflation. Some hawks have already pencilled in a summer rate rise – but Mervyn and (most of) his committee have consistently argued that the economy’s underlying weakness makes a hike not only unnecessary but also rather dangerous. Today’s dismal data from the high street, which point to dwindling consumer demand, provides further ammunition for this case.
The ONS also said today that core inflation – which strips out fuel and food costs – was also down, from 3.4% to 3.2%. The theory is that this measure provides a better reflection of the underlying situation, without the distorting impact of short-term commodity price volatility. However, we’re not convinced it’s a particularly useful metric. For a start, it bears little relation to the cost of living, since the average household wouldn’t last very long if they stopped spending money on fuel and food. Also, there’s no reason to think that rising fuel prices is a temporary phenomenon; if demand is growing, and supply is limited, surely prices are only going in one direction?
So King won’t be jumping on his desk and blowing raspberries at his critics just yet. After all, CPI inflation is still running at double the Bank’s target. And with rising oil prices likely to push the index back up again in the coming months, his problems aren’t over yet.