Guest Blogpost from Richard Lynch: Sharp fall in January inflation

The latest Office for National Statistics figures show inflation falling sharply in January, as the effects of last year’s VAT increase fell out of the calculations. However, prices are still rising faster than wage increases and faster than in the large majority of competitor economies.

The figures for the year to end January 2012 (and end December 2011) are as follows:

Retail Prices Index (RPI)                                –                       3.9% (4.8%)

RPI excluding mortgage interest (RPIX)        –                       4.0% (5.0%)

Consumer Prices Index (CPI)                                    –                       3.6% (4.2%)

Much of the fall was due to technical reasons, mainly because current prices are now being compared with prices after the VAT increase from 17.5% to 20% last year, rather than prices prior to that increase. The increase in VAT is estimated to have added around 0.76% to inflation figures during 2011 and a fall in the figures was therefore expected when it was no longer a factor in the calculations.

However, there were also other downward pressures on inflation in January with the CPI, for example, affected by lower prices for clothing and footwear, furniture and household goods, due to the new year sales.

But there were upward pressures as well. In the case of the CPI, these included annual increases in the prices of alcoholic beverages and tobacco (6%), electricity (13.2%), gas (18.7%), tools and equipment for houses and gardens (16.8%), air transport (9.6%), jewellery, clocks and watches (8.4%) and transport insurance (15.5%). Upward pressures on the RPI came from increases in the price of biscuits and cakes (10%), beef (11.6%), lamb (16.2%), pork (11.7%), coffee and other hot drinks (15.2%), tobacco (8.8%), electricity (13.2%), gas (19.1%), vehicle tax and insurance (14.2%) and CDs (6.5%).

UK inflation is now no longer the highest in the EU but our 3.6% CPI is still higher than the CPI rate in the Euro Area (2.6%), in the EU as a whole (2.9%) and in 22 of the 27 member countries. These lower-inflation countries include Ireland (1.3%), Spain (2%), Greece (2.1%), Germany (2.3%), France (2.6%) and Italy (3.4%). It also compares badly to CPI rates in Japan (0.1%), Switzerland (-0.9%) and the US (2.9%).

Almost all economists are predicting that inflation will be lower in 2012 than in 2011, but there are mixed views on whether there will be sustained reductions during the year or whether prices will remain stubbornly high. The Bank of England is predicting significant falls by the end of the year, but they have made similar predictions over recent years and they have been consistently wrong. In addition, recent figures showing diesel prices at a record high of 143.7p a litre and petrol prices at a record high of 137.4 p a litre, suggest that there is more bad news to come.

Richard Lynch is a Dudden Hill resident. He is a retired Unite the Union official and currently conducts voluntary work on employment rights for the Brent Community Law Centre. He also acts as an accompanying representative for the GMB union.

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