UK inflation drops, but more pain ahead

The rate of inflation in the UK fell to its lowest level in more than two years last month, according to the Office for National Statistics (ONS).

by Michael Northcott
Last Updated: 19 Aug 2013

The British people will get more bang for their buck after the ONS announced today that the Consumer Prices Index (CPI) measure of inflation fell to 3% in April, from 3.5% in March. But whilst the fall is a welcome improvement, the IMF has today weighed in recommending the UK cuts its interest rates, and the OECD says we’re in for another 18 months of pain, as unemployment has not yet peaked.

We are still short of reaching the 2% target inflation set by the Bank of England, which will not likely be reached until early next year, according to the ONS figures. The Governor of the Bank of England, Sir Mervyn King, says that the rate of inflation will remain above the target because of the economic and political turmoil in the eurozone, which he described in recent weeks as ‘tearing itself apart’. 

This turbulence poses a threat to the UK’s economic recovery, which the OECD today said is still 18 months away, as well as letting us know that employment is yet to hit its high of 9%, which will come at some point in 2013, it reckons. The IMF endorsed the government’s austerity programme, but said cutting interest rates and indulging in more quantitative easing may help accelerate the recovery. It is worth pointing out however, that neither measure has made much difference so far, despite both having been tried several times already…

However, today is the first time since the coalition government took power that Merv has not had to explain the figures to Chancellor George Osborne, suggesting at least some key economic metrics might be on the mend. Merv is required to write a letter to the Chancellor if inflation remains above 3% or below 1% for more than three months in a row, parameters that have been consistently breached since the general election in 2010. This month his pen will remain capped.

So why is our inflation situation gradually improving? The ONS puts it down partly to the timing of Easter in 2011 when some of the inflation data was collected during the school holidays. This meant that transport costs were rising, but this year’s April data was not as heavily affected by a similar price rise because of the way the school holiday dates fell. We’ve also benefited from the cost of clothing and off licence alcohol increasing more slowly, but the most significant factor was air transport, where costs rose 29% in April 2011, but just 7.4% this April.

Inflation may be falling but is yet to make a real term difference to the average wallet: pay is increasing at just 0.6%, so incomes are squeezed further with each passing month. Furthermore, anyone with savings is actually losing money in real terms unless their bank’s interest rate is at around 3.75%, is a rare deal. Here’s hoping inflation continues to fall, people’s wages have greater purchasing power, and some confidence returns to the market. It may be some time, though…

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