Inflation shock for UK economy

Economists were left scratching their heads as the Consumer Prices Index (CPI) annual inflation – the government’s target measure – was 3.2 per cent in February, up from three per cent in January.

However, the Retail Prices Index (RPI) inflation hit zero in February, down from 0.1 per cent in January, as it took into account the large downward pressure from mortgage interest payments – a factor excluded in the CPI calculations.

David Kern, chief economist at the British Chambers of Commerce (BCC), says: ‘These surprisingly strong inflation figures postpone but do not remove the risk of deflation in 2009.

‘While the figures may partly be due to sterling’s weakness, they may also indicate that productive potential in the economy is falling and there is less spare capacity to exert downward pressure on prices.’

Upward pressure on the CPI annual rate mainly came from food and non-alcoholic drinks, with the biggest individual factor being an increase in the price of vegetables.

The only large downward pressure on the CPI annual rate came from housing and household services, due to gas and electricity bills remaining the same this year.

The CPI shows that the UK inflation rate in January, at three per cent, was above the provisional figure for the European Union as a whole of 1.7 per cent.

Related Topics