The Bank of England’s target figure for inflation is 2% and if inflation comes in above the 3% level, the Governor of the Bank of England is required to write to the Prime Minister to explain why it has happened. It looks unlikely if Mervyn King’s successor as Governor, Mark Carney will need to make such an explanation to the PM in the near future. UK inflation has been above target since December 2009.
According to figures for October just released by the Office for National Statistics (ONS), inflation, measured by the consumer prices index (CPI), has fallen from 2.7% in September to stand at 2.2% in October. UK CPI inflation is now at its lowest level in 13 months.
The extent of the decline took analysts by surprise. According to ONS, the largest factor contributing to the fall was a drop in transport prices of 1.5% which was the sharpest seen since July 2009. Fuel costs have been eased between September and August with the cost of a barrel of Brent crude fall by more than 10% which has spurred a supermarket fuel price skirmish (war is too dramatic a term to use). Some air fares also saw cuts, helping to trim the CPI. The effect of a controversial decision to raise university tuition fees, which came in last year, has started to work its way through the system and helped to drop the headline figure. The rate of food inflation (as a separate item) also eased from 4.8% in September to 4.3% last month.
A different index of inflation, the retail price index, also declined in October from 3.2% to 2.6%.
According to the Bank of England’s “Forward Guidance”, interest rates will remain on hold at 0.5% until unemployment falls below 7%. It seems that inflation is reasonably constrained, so rates would not need to be raised to bring it under control – this would be undesirable since it would choke off liquidity by throttling back the “cheap money” which is apparently floating around trying to tempt businesses to invest and so stoke recovery and employment.