The latest 12-month CPI inflation rate* of 4.5%, up 0.1% from July 2011, confirms that UK inflation continues to edge towards the psychologically significant 5% mark, and is now over double the Bank of England’s official target. According to the ONS, price rises in clothing and footwear (up 3.7%), and furniture, household equipment and maintenance (up 2%), along with higher electricity and gas bills, were the main contributors to higher inflation. The figure would have been higher but for falling prices in some key sectors, including computer games and consoles (down 2%), and alcoholic beverages and tobacco (down 0.6%) following aggressive competition between specialist stores and supermarkets. With pay, including bonuses, increasing by a modest 2.8%, inflation continues to reduce real incomes. In previous decades even the merest expectation of such levels of inflation would have warranted an increase in the official bank rate, but, since March 2009, rates have been stuck at 0.5%. With unemployment continuing to rise, and with UK growth stalling at just 0.2%, there is, yet again, unlikely to be any desire by MPC members to tighten monetary conditions. The only loosening may come in the form of more quantitative easing, which is now looking increasingly likely.
*The change in the CPI 12-month rate is found by comparing price changes in the last two months of the ‘rolling year’ compared with the same two months one year ago.