Inflation falls but 'core' CPI shows increase
Jul 14 2010 by Alun Thorne, Birmingham Post
High street summer sales and falling petrol costs in June failed to dispel worries over a lingering inflation threat according to the latest figures.
Official figures showed the Consumer Prices Index (CPI) benchmark falling from 3.4 per cent to 3.2 per cent over the month thanks to record price-slashing by retailers and a 2.6p a litre drop in petrol costs.
But the figure remains well above the Bank of England’s 2 per cent target while “core” CPI - excluding volatile elements such as food and energy costs - rose from 2.9 per cent to 3.1 per cent.
The pressure on motorists at the petrol pump may have eased, but the data showed a huge rise in car insurance costs - up 36 per cent on a year earlier in June after a record 5.7 per cent rise in premiums over the month.
Other factors pushing up underlying inflation were sharp rises in airfares to European and long-haul destinations - including South Africa as ticket prices doubled due to the World Cup.
Despite the fall in the overall inflation rate, the underlying price pressures will add to the debate on the Bank of England’s Monetary Policy Committee (MPC)
CPI remains well above the Monetary Policy Committee’s (MPC) 2 per cent target and has stayed at 3 per cent or higher throughout 2010. Inflation is set to rise again when VAT is hiked to 20 per cent next January. Business leaders from across the region believe that it is increasingly important that the MPC holds its nerve and keeps interest rates low.
Will Rogers, policy adviser at Birmingham Chamber of Commerce and Industry (BCI) said: “Early sales will mean that businesses will make smaller profits. There is only a limited amount of time that retailers will be able to sustain discounted prices.
“The economy is still very fragile and realistically to meet the recovery head on, businesses will have to increase their profit margin.
“We would therefore urge the government to keep interest rates static for the time being, which will give business more time to recover.”
Alan Durham, director of policy at the Coventry and Warwickshire Chamber of Commerce, said: “Headline inflation has fallen but core inflation, which removes factors such as energy and food, has risen.
“The Bank of England will be very aware of that and one of the members of its Monetary Policy Committee has voted for a rise in interest rates at a recent monthly meeting.
“The Bank can use interest rates to try to contain inflation but it must also look at the bigger picture and we are urging them to keep rates at their record low for as long as possible.
“Low rates are crucial to the recovery and the wider feeling is that inflation will fall back later in the year so the Bank should maintain its steady hand on rates.”
