Inflation unchanged but economic pressures increase

INFLATION remained at 3.1% during August, unchanged from July but still well above Government targets of 2%, latest data from The Office for National Statistics has shown.

Under normal circumstances such a figure would raise alarm bells and lead to calls for interest rate rises.

However, in the present climate business leaders have appealed for calm and urged the Bank of England to resist the calls in the hope of maintaining the right conditions for growth.

The latest CPI figures show that while the rate of inflation was unchanged last month there were still significant pressures on the economy.

The largest upward pressures came from:

•    Air transport, where fares rose by 16.1% this year (a record for a July to August period) compared to a rise of 8.3% a year ago.
•    Clothing and footwear, where prices overall rose by 2.8% this year, which is the largest rise between July and August since 2001. The largest upward effects came from women’s outerwear where, in particular, prices rose sharply this year at the start of the 2010 autumn season
•    Food, where the largest upward effects came from bread and cereals, and vegetables. Bread and cereal prices rose by 1.2% between July and August this year but fell by 1% a year ago. The upward effects this year include wheat related products such as breakfast cereals, cakes and dried potted snacks. Vegetable prices overall fell between July and August this year but by less than a year ago.

The largest downward pressures to the change in CPI inflation came from:

•    Falling second-hand car prices between July and August this year compared to sharp price rises a year ago
•    Fuel and lubricants, where prices, overall, fell by 1% between July and August this year but rose by 1% a year ago, principally reflecting a fall of 1.2p per litre in the price of petrol this year compared with a rise of 1.1p per litre a year ago.

Alan Durham, director of policy at the Coventry and Warwickshire Chamber of Commerce, said the latest inflation figures must not alter policy on interest rates.

He said: “These are very testing times for the Bank of England’s Monetary Policy Committee. In ordinary circumstances, sustained inflation over 3% would have been met with interest rate rises.

“But these are not ordinary circumstances – in fact, quite extraordinary.
“They are in place to try to ensure that the UK economy does not slip back into recession and need to be maintained.

“The strong feeling is that inflation will begin to fall back in the next 12 months and that the MPC is better placed at using interest rates to maintain momentum in the economy rather than trying to peg back inflation.”