High air fares, clothes and food cause UK inflation to stick at 3.1 pc  

Financial News

High air fares, food and clothing have caused the UK CPI (Consumer Price Index) to stick at 3.1 pc according to the Office for National Statistics. RPI (Retail Price Index), which includes the cost of housing, reduced slightly to 4.7 pc down from 4.8 pc in July.

The news has come as a shock to many experts who expected CPI to drop to 2.9 pc. The figure remains well above the Bank of England’s 2 pc target and marks the end of a three month period during which the rate had been falling.  

Results out this week show the cost of air fares rose a record 16 pc in August, while clothing and footwear prices also rose dramatically. The rising cost of cotton and the pound’s weakness against the dollar are also thought to be factors behind the high rate of inflation. Fires in Russia and the Pakistan floods have led to a worldwide wheat shortage, which is believed to have affected the price of many everyday food items, such as cereals and bread.

The UK RPI also failed to fall as dramatically as economists had predicted. The rate dropped to 4.7 pc from July’s 4.8 pc but experts had anticipated a drop of another 0.1 pc. CPI is used for the Bank of England’s target, while RPI includes housing costs and is important when discussing wage rises and calculating mortgage repayments.

There is little confidence that inflation will fall over the coming months: “Overall inflation is stubbornly high and the impact of higher wheat prices has yet to exert itself fully on CPI figures … The Governor [of the Bank of England] would be well advised to keep his pen out on his desk given that he’ll have to write more letters to the Chancellor,” commented Philip Shaw of Investec.

The economy will be subject to further inflationary pressure early in the New Year as the VAT rise announced in the budget is introduced.

The news that inflation is remaining stubbornly above the targets set by the government will be a worry not only for the Bank of England but others too. In a time of low pay settlements the real value of employee’s salaries will start to fall as will the value of savings if interest rates remain, for the most part, below the level of inflation.

We may over coming months see more pressure on the Bank to slowly increase interest rates to combat the current levels of inflation. However they will have to tread carefully and balance the needs of savers and those who want low inflation with the desire of business and mortgage holders to see the current low levels of interest rates maintained for some time to come.