Surprise fall in inflation wrongfoots Bank's experts

Click to follow
The Independent Online

Breaking the trend of inexorably rising inflation that has prevailed since last summer, the Office for National Statistics said yesterday that the annual increase in prices in the year to March was 4 per cent, a marked drop on the 4.4 per cent recorded in February.

The surprise drop in inflation means the chances of the Bank of England raising interest rates next month to control mounting inflationary pressures have sharply receded. Recent evidence also suggests that the pace of recovery, especially in the construction and manufacturing sectors, has slowed in recent weeks, and this has also also weakened the case for higher rates and bigger mortgage bills.

The ONS was forced to deny claims that the latest Consumer Price Index (CPI) inflation figures had been leaked before their official publication at 9.30am, after activity in the City suggested some traders had advance news of the numbers – and made money from the information. The ONS said last night: "We are aware of rumours... that the inflation figures... may have been leaked in advance of publication. Our initial check shows no evidence of such a leak."

On the older measure, the Retail Price Index (RPI), which measures the change in the cost of a basket of retail goods and services, the rate fell from 5.5 to 5.3 per cent. Moderating food prices were the main reason inflation fell, with lower air fares and domestic fuel bills also easing the squeeze on household budgets. The Bank of England will also be greatly relived that the rate of "core" inflation – the part that is generated at home from, say, higher wage costs – is also falling, implying that most of the inflation is still caused by the soaring world cost of food, oil and other commodities.

The January increase in VAT – another "one-off" factor – was responsible for about 0.75 percentage points of the rise. Again, this will drop out by this time next year and, the Bank believes, help to push inflation back towards the official 2 per cent target. Nonetheless, most economists stick to the view that inflation will rise again this year, given recent volatility in oil prices in particular, in turn spurred by the tensions in the Middle East and the natural and nuclear disasters unfolding in Japan.

Recovering, if fragile, economies in the West and breakneck expansion in fast-growing nations such as China, Brazil and India is also adding to pressure on prices, especially food. While unwelcome to British consumers, rising food costs are matter of life and death in developing and emerging economies where food typically accounts for 50 per cent of a family's outgoings.

As with the last global food price spike in 2008, the consequences can be political. At least some of the turmoil in the Middle East and North Africa is down to higher food prices draining economies of spending power and making the creation of jobs for their burgeoning young populations even harder. The price of oil, traditionally expressed in US dollars, is also pushed higher as the value of the "greenback" falls on world markets. Economists fear all those trends are set to persist, with consequences for Britain. Alan Clarke, of BNP Paribas, said: "Sadly, we expect this slowdown in inflation to be short-lived. Inflation is likely to resume its upward trajectory from next month onwards, with CPI inflation still approaching 5 per cent by the year end. In particular, it is looking increasingly likely that domestic utility bills will rise by close to 10 per cent later in the year. given the trend of wholesale gas prices.

"Similarly, the acceleration in the CPI component for food has not yet caught up with the jump in agricultural commodity prices."

Commodities that could push inflation back up


Politics at work again. The unrest in Ivory Coast has severely constrained exports, and the country produces about a third of the world's cocoa. Bad news for chocoholics in the west, but good news for other producers such as Ghana.


Suffered a triple-whammy effect from increased demand for it as a staple (maize feeds much of Africa), as an animal feed meeting Asia's demand for poultry, and as a biofuel. Of all the price inflations, this has hit the world's poorest the hardest.


One of the most spectacular increases in prices, up by a third in a few months. Egyptian exports were disrupted by the revolution, poor weather has affected the crop in Pakistan, and demand from the emerging markets has increased.


Tensions in the Middle East and North Africa, especially Libya, have pushed the price higher, while demand is fed by the expansion of nations such as India. The IMF says much dearer oil would be needed to choke off recovery, but if Saudi fell...