Inflation shows no sign of abating
Inflation reached a surprising four-month-high of 3.2% in October, despite predictions that it would stay unchanged at 3.1%.
The UK consumer prices index (CPI) rose to 3.2% due to rises in toys, alcohol and tobacco, and an increase in the price of petrol.
During October, consumer prices rose 0.3%, slightly more than the 0.2% increase expected, and the main contributions were the price of games, toys and hobbies, which increased by 1.9%, and alcoholic beverages and tobacco prices that grew by 0.8%.
Prices of fuel and lubricants rose by 1.8%, largely reflecting a rise of 2.1 pence per litre in the price of petrol. The rise of fuel prices also includes the increase in road fuel duty, which took effect on 1 October.
Downward pressures on CPI came from the falling price of food, especially vegetables and meat.
As CPI remains more than one percentage point above the Bank of England’s 2 per cent target, governor Mervyn King will have to write his fourth letter of the year to George Osborne, explaining why he has failed to bring the rate down.
It’s predicted that after the government’s budget cuts are implemented and the higher rate of VAT kicks in at the start of 2011, inflation could rise above 3.5% in the new year and it’s unlikely to fall back below 2% by early 2012.
The retail prices index (RPI) measure of inflation, which includes more housing costs, fell to 4.5%, from 4.6% in September.
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).