Inflation rises to 1.9% in November
Higher energy and transport costs led to the rate of inflation increasing during November to just below its official target.
The Consumer Prices Index (CPI) – the official rate of inflation in the UK – hit 1.9% last month from 1.5% in October. The Bank of England's remit is to keep inflation within 100 basis points of 2%.
Higher energy fuel and energy costs this November, compared to last, were the biggest driver behind the rise. Clothing, footwear and energy bill inflation also contributed to the rising cost of living.
Meanwhile, the Retail Prices Index (RPI) – which includes mortgage costs – turned positive in November for the first time since April. This measure of inflation rose from -0.8% in October to hit 0.3% last month.
This is first time the annual inflation rate has increased by more than 1.1% in a month since April 1990 - when the rate increased from 8.1% to 9.4%.
Inflation is expected to rise beyond its 2% target in the new year, partly because the rate of VAT will return to 17.5% on 1 January after more than one year at 15%. Mark Bolsom, head of UK trading desk at Travelex, says the weaker pound and rising oil prices will also help inflation climb as high as 3% “early next year”.
But both the Bank of England and independent economists forecast that inflation will slow later in the year, probably falling below the 2% target.
Jonathan Loynes, chief European economist at Capital Economics, says the higher rate of inflation expected next year will be “temporary”.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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.
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).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).