Rate of inflation slows in August


New figures out today from the Office of National Statistics (ONS) show that the rate of inflation fell slightly in August.

The Consumer Prices Index (CPI) fell to 2.5% in August, from 2.6% in July, whereas the Retail Prices Index (RPI), which includes housing costs, fell from 3.2% to 2.9%.

The ONS said that falling clothing prices, and reductions in the cost of household goods, helped to contribute to the slowdown, although petrol and rail fares have risen.

Rate of inflation falling

Today’s figures form part of a trend of falling inflation, with only two months out of the past 12 showing an increase.

Inflation is now significantly lower than the peak of 5.2% in September last year, although the immediate future remains uncertain, with the Bank of England still predicting that inflation will fall below their 2% target early in 2013, others though, disagree.

The ONS have said that inflation could start to rise in the months ahead, Richard Campbell, Director of the ONS said:  “Some of the utility companies are talking about price increases in the next few months, (and) there have been reports of poor harvests in many parts or the world, which could possibly have an impact on food prices.”

He continued: “Finally, if the oil price continues to go up, we expect that to feed through to petrol and diesel prices.”

The Bank of England’s program of Quantitative Easing (QE), where billions of pounds have been pumped into the economy, could cause inflation to rise in the months ahead.

However, other economists take a different view, believing that the weak economy in the UK will offset any inflationary pressures.

Speaking to the Daily Telegraph, Rabvir Singh of RANsquawk, said: “While July’s surge in prices in the face of anaemic demand and weak consumer confidence was truly baffling, the inflationary pressures which threaten to push up prices at the tail end of 2012 are clear to see. With Brent crude approaching a four-month high and prices at the pump creeping steadily up, it may be August’s easing of CPI that is the blip, not July’s spike.”

More Quantitative Easing?

The downward trend in the rate of inflation, may mean that the Bank of England are prepared to consider extending the existing program of QE, which last happened in July, when a further £50 billion was added.

The effects of QE are a source of much debate, with the Bank saying that it has hugely helped an ailing economy, but with many consumer groups, especially those supporting older generations, protesting that QE has reduced Annuity rates , causing financial hardship to many would-be retirees.

It is certainly the case the Bank’s policy of keeping interest rates artificially low has reduced the returns from savings.

Today’s inflation numbers will come as a relief to people on fixed incomes and also savers, who have seen interest rates fall dramatically over recent weeks as banks and building societies cut rates for a variety of reasons. The quest for the best buy savings accounts , which equal the rate of inflation, continues for many savers, although the issue now is not so much the rate of inflation, but falling interest rates.