Inflation unchanged in March
Inflation remained steady in March despite concerns that February’s interest rate cut could prompt a sharp rise.
The Bank of England’s Monetary Policy Committee (MPC) had previously warned that rising food and energy prices, plus February’s interest rate cut, would cause a sharp rise in inflation. However, official figures reveal that in fact inflation remained unchanged at 2.5% in March.
Cheaper furniture and toys helped keep inflation from rising, according to the Office of National Statistics. These factors offset the rising cost of transport, gas and electricity.
The government uses the Consumer Price Index as its official figure of inflation – however, many economists argue that the Retail Price Index (RPI) is more telling as it also includes mortgage repayments.
In March, RPI fell to 3.8% down from 4.1% in February.
The Office of National Statistics says the fall was caused by cheaper mortgage interest payments as lenders passed on February’s quarter point decrease in interest rates. However, falling house prices also prompted the fall.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).