Inflation unchanged as rising food prices offset by falling hotel costs
This is unchanged from July.
While food prices and airfares are rising, hotel accommodation prices are falling, and there have been smaller increases in the prices of alcohol, clothing and footwear than a year ago.
Meanwhile, the Retail Prices Index (RPI) rate of inflation, which unlike CPI includes costs relating to housing, stood at 1.8% in the year to August - down from 1.9% in the year to July.
Ben Brettell, senior economist at Hargreaves Lansdown says: “Economists had been expecting inflation to rise for the third consecutive month in August, as retailers passed rising import costs on to consumers.
“However, the ONS data showed consumer price inflation remained at 0.6%. As yet the effect of the weaker pound on consumer prices appears muted.
“Forecasts suggest the drop in sterling will ultimately add around five percentage points to the Consumer Prices Index, but it’s as yet unclear whether that will come via a gradual uptick in the inflation rate over a couple of years, or a shorter, sharper bout of inflation over the coming months.”
Andy Scott, economist at HiFX, adds: “Following Sterling’s much more significant fall following the financial crisis in 2008 we saw a mixed picture in this regard as the economy went into reverse, forcing certain industries to absorb the cost rather than risk losing sales by raising their prices.
“In the post Brexit economy where there is already significant monetary support in place, with record low interest rates and another £70bn of quantitative easing from the Bank of England, there may be more confidence that demand would not drop significantly due to relatively small price increases.
“In this scenario, we would expect to see inflation rise above the Bank of England’s 2% target in the months ahead.”
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.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
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).