UK February Inflation Snapshot

Stronger than expected airfares led the way in boosting February’s year on year CPI number to 2.8%, up from 2.7% in January, and still well above the Bank of England’s target (2%). There was also a big jump up in the RPI number to 4.6%, thanks to mortgage interest payments and other housing costs. This headline inflation number is now running ahead of average earnings growth (4.2% on the Bank’s preferred 3 month annualised measure, 3.5% excluding one off bonuses), meaning that on average workers are receiving real pay cuts and suggesting that consumption should slow during 2007.

 

There was some good news for inflation watchers however, with the release of the Office of National Statistics’ changes to the basket of goods that go into the price indices. A number of newish technologies have gone into the basket – for example recordable DVDs, SatNav and digital radios. These items are all made in China and the Far East and are likely to experience price deflation if history is any guide. In addition, the weighting of fuel and light has increased (to 3.9%), and given that a number of energy suppliers have announced price cuts to come in later this year, this is also likely to put downward pressure on the inflation numbers.

Nevertheless, with CPI heading back towards the level where the Bank of England has to write that letter to the Chancellor, at least another rate hike is likely – in my view the only things that would keep them on hold are a further selloff in global equities, or signs of an imminent US recession.

 

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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