Inflation eases

Inflationary pressures eased slightly during June, curbed by weak consumer spending. The Consumer Price Index rose at an annualised rate of 4.2% in the year to June, compared with 4.5% in the year to May. According to the Office for National Statistics, the decline was caused by lower prices for recreational goods such as computer games, toys, televisions, and digital cameras.

Nevertheless, the rate of inflation remains significantly higher than the Bank of England’s (BoE’s) government-set target of 2%, although policymakers expect inflation to fall more in line with the target after 2012. In the meantime, the BoE’s Monetary Policy Committee (MPC) continues to grapple with the conundrum of how best to cool inflationary pressures without derailing the UK’s sluggish economic recovery.

Interest rates have remained at a record low of 0.5% since March 2009; this is good news for borrowers, many of whom are enjoying an improvement in the availability and terms of mortgage deals. However, low interest rates spell bad news for savers, who continue to struggle with low interest payments. There is some dissent within the MPC – two members of the Committee voted for an increase in interest rates at the MPC’s June meeting, while seven members voted in favour of maintaining rates at 0.5%, believing that higher tax rates and cuts in public spending will have a naturally depressing effect on prices.

The British Chambers of Commerce (BCC) has pointed out that many of the factors fuelling inflation are beyond the control of the MPC: domestic inflationary pressures are being exacerbated by external factors, such as natural disasters in key commodity-producing countries. Producer price inflation accelerated between May and June; meanwhile, energy prices continue to rise and British Gas recently announced an increase in its tariffs. The BCC has urged policymakers to postpone any increases in interest rates until the fourth quarter of 2011 at the earliest.

According to a study undertaken by the British Retail Consortium (BRC) and Nielsen, prices in shops posted their strongest increase for two and a half years during June, rising by 2.9% year on year. The increase was fuelled by rising prices for food and commodities. Nevertheless, shop prices are rising more slowly than the broader measure of inflation: 39% of spending on groceries is on promoted goods, and the BRC believes that retailers are using discounts to generate sales at the expense of margins.