Inflation Down In June

UK inflation has seen its second successive monthly fall to 3.2% in June from 3.4% in May.  However, according to the Office of National Statistics, the year on year rise in the Consumer Price Index (CPI) is still well above the 2% target set down by the Bank of England.

The pound grew 0.6% to above $1.50 on the news that the CPI figure was slightly above expectations.  It was thought that June’s figure would come out at 3.1%.

The Retail Prices Index (RPI) also saw a drop in June, coming out at 5%, following on from 5.1% in May.

The RPI measure includes housing costs and used to be used for the Bank's inflation target, and is widely used in pay talks.

Falling clothing and fuel prices helped weigh the headline inflation rate down.

Core inflation on the other hand, which ignores volatile energy and food prices, increase to 3.1% from 2.9%, equalling its highest level since records began in 1997.

The accelerating core inflation suggests that the longer term trend direction of inflation may in fact still be upwards.

A major factor behind this was the rising cost of services, which rose from 3.4% to 3.9% in May.

The recent spike in inflation had been driven by the VAT rise back to 17.5%, the weak pound and the recovery in commodity prices, among other factors.

Moreover, a further rise in VAT to 20% will temporarily bolster prices again in January.

The Bank of England believes that, as the effects of the government budget cuts kick in and the pound stabilises, inflation will return to its 2% target over coming months.

Posted at 04:44PM Jul 13, 2010 by Marc Stenton in The Economy  |  Comments[0]