Inflation soars to 4.4% in July

12 August 2008

Inflation soared to an alarming 4.4% in July - up from 3.8% the previous month, reflecting the rising cost of food and petrol.

The government’s target for the Consumer Price Index (CPI) – the official measure of inflation – is 2%. When inflation rises to more than 100 basis points above this target, the Bank of England’s governor Mervyn King is required to write to Alistair Darling to explain the reasons and outline how inflation will be tackled.

The CPI is now at its highest since April 1992, with July's increase the biggest since records began.

Shadow chief secretary to the Treasury, Philip Hammond, says the new figures are "shocking" and reflect what many families have been feeling for many months.

“With the cost of living soaring and inflation doubling in six months, families are crying out for some leadership from their Prime Minister. But all we get from Gordon Brown is confusion, dithering and economic incompetence – with the prospect of yet more tax rises to come,” he says.

The news may spark concerns that the Monetary Policy Committee (MPC) – which sets interest rates – will now be tempted to increase rates to help bring inflation back down to target. But economists largely predict that rates will remain frozen for the rest of 2008, with cuts planned early in 2009.

Charles Davis, an economist at Centre for Economic and Business Research, says the inflation figure for July is higher than expected, but is largely driven by commodity prices. Core inflation - excluding energy and food - is only running at 1.9%, he adds.

"In the short-term, inflation is likely to rise further as record input price rises feed through the supply chain," says Davis. "Given this and the need for the Bank of England to maintain its inflation fighting credibility, interest rates are likely to remain on hold through the remainder of 2008. [However] the UK economy is slowing considerably – so rates will be cut next year when inflation dies down."

Soaring inflation is largely the result of rising food costs, especially from meat, bread, cereals and vegetables. However, higher transport costs, as a result of petrol prices, also contributed to the rise as did utility bill hikes.

Consumer Prices Index (CPI) annual inflation – the Government’s target measure – was 4.4% in July, up from 3.8% in June.

Furniture, fashion and eating in restaurants also had an impact.

The Retail Price Index – another measure of inflation that includes mortgage repayments – also rose in July to 5%, up from 4.6% in June.

The quarterly inflation report, which outlines in more detail why inflation is rising and the impact of this, is due out on 13 August.

Peter Newland, an economist at Lehman Brothers, says: "MPC members would have seen an advanced estimate of the CPI ahead of the August policy meeting and it likely raised further concerns about the feed through of headline inflation into inflation expectations, core prices and wages.

"As such, tomorrow’s inflation report is unlikely to take a particularly dovish tone, despite the clearer downturn in economic activity, supporting the case for rates to remain on hold in the near term with continued heightened vigilance on price pressures."

He adds: "We continue to judge that the sharp slowdown in activity will restrain core inflation and wages and that, once the near-term spike in inflation passes, the next move in interest rates will be down."

Official inflation may be at the 4.4% mark, but many people will be struggling with a much higher personal inflation – especially those on fixed incomes such as retirees.

Research suggests that people aged over 75 have an inflation rate of 6.3%, while 65 to 74-year-olds have an inflation rate of 5.8%. The under 30s are the best off, with a personal inflation rate that matches CPI, but this rises to 5% for people aged between 30 and 50, and 5.4% for people aged between 50 and 65.

The figures, from Alliance Trust, also found that higher electricity and gas bills have hit those aged over 75 the hardest, with prices up 13% over the last year. As this age group spend almost 7% of their budget on energy bills whereas people aged under 30 households spend 3%.

In addition, rising food prices have hit the older generations particularly hard, with those aged over 75 allocating 16% of their budgets on food compared to under 9% for the under 30s.

Shona Dobbie, head of the Alliance Trust research centre, says: “This sharp increase in living costs affects the elderly in particular because these households spend a much higher proportion of their budgets on basic food items.

"Although the oil price has been falling back over the last few weeks, and we could see petrol price inflation begin to ease, over the next couple of months we expect little respite from high food and utility prices. This means that headline inflation is likely to remain at elevated levels and, even when inflationary forces begin to ease, we expect actual price levels for basic goods and services to remain high.”


Add new comment