14
Sep
UK inflation rate remains at 3.1%
UK Consumer Prices Index (CPI) inflation remained unchanged in
August at 3.1%, according to the Office for National Statistics
(ONS).
It means the rate remains well above the Bank of England's 2%
target, and it brings to an end a three-month period during which
the rate had been falling.
The unexpectedly high rate was boosted by strong rises in air
fares, clothing and food. Fuel prices fell.
Retail Prices Index (RPI) inflation slowed to 4.7%, down from
4.8% in July.
CPI is used for the Bank of England's target. However, RPI -
which includes more housing costs - is important for wage
negotiations, and is used to calculate certain benefit increases
and mortgage payments.
Economists had forecast lower rates of inflation for August,
with CPI expected at 2.9% and RPI at 4.6%.
The news could strengthen the position of Andrew Sentance, the
member of the Bank's Monetary Policy Committee who broke ranks over
the summer to vote in favour of an interest rate increase.
The pound jumped 0.6% against the dollar on the news, to $1.544,
as markets priced in the probability that UK interest rates may
rise sooner than previously expected.
Food prices
Air fares, which tend to rise during the summer holiday months,
jumped 16% in August - their sharpest rise for the month on
record.
Clothing and footwear prices rose at their fastest monthly rate
for an August since 2001, although prices remain below their level
of a year ago.
The news follows a warning from department store Debenhams, who
said on Tuesday that the entire UK clothes retail industry faced
higher prices, thanks to the rising cost of cotton and the weak
pound.
The warning was echoed comments by retailer Primark on Monday
that rising costs may eat into its profit margins over the coming
year.
Summer sales discounts happened earlier in the year than usual,
meaning that discounting had a relatively smaller impact on the
August data than usual.
Food costs continued to rise, with bread, cereals and vegetables
leading the way.
Wheat prices hit a 22-month high in August after rising more
than 50% since the end of June.
Target missed
More worryingly for economists, the core inflation rate rose to
2.8%, from 2.6% in July.
Core inflation strips out volatile food and energy prices, and
is used to gauge the underlying longer-term inflation trend.
The CPI inflation rate has now remained above the Bank of
England's target for nine months.
Mervyn King, the Bank's governor, is likely to be disappointed
that the rate has remained outside the government's 1%-3% tolerance
range for another month.
Last month, he had to write a letter to the chancellor of the
exchequer explaining why the rate was still more than one
percentage point above its 2% target.
He blamed temporary factors, including the return of VAT in
January to 17.5%, past rises in oil prices and higher import prices
as a result of the depreciation in the pound since the middle of
2007.
However, he said "there remains a significant probability that I
will need to write further open letters to you in the coming
months".
VAT is set to rise again, to 20%, in January next year, giving a
further boost to headline inflation figures
Eroding savings
The continuing high rate of inflation will be bad news for
savers.
With interest rates at record lows, the real value of savings is
being steadily weakened.
"Inflation is a stealthy enemy that quietly erodes the spending
power of a saver's hard-earned nest egg," said Darren Cook of the
financial information service Moneyfacts.
He points out that a basic rate taxpayer needs to find an
account paying 3.88%, while a higher rate tax payer needs to find
an account offering 5.17%, in order to maintain the real value of
their savings.
"The average instant access savings rate is still at rock bottom
at a rate of only 0.77%," said Mr Cook.
"Only 91 out of a possible 1,020 accounts allow a basic rate tax
payer to just break even at 3.88%."
The average savings pot of a basic rate tax payer is in effect
being eroded by 2.48% per year.
Source:http://www.bbc.co.uk/news/business