UK inflation rises despite sluggish economy

• Rail passengers face 8% increase • Bank charges add to cost of living • High-street bargains harder to find • RPI stuck at 5% Rail passengers in Britain will face inflation-busting fare increases of 8% on average next year after the latest figures for the cost of living showed upward pressure on prices despite the weakness in the economy. Data from the Office for National Statistics showed that the government’s preferred measure of inflation – the Consumer Prices Index – rose from 4.2% to 4.4% in July as banks increased charges on their customers and bargains in the summer sales were harder to find. Many shops were forced to slash prices in June in a response to the weakness in consumer demand, resulting in much smaller price falls for clothing and footwear and furniture in July than usual. Clothing and footwear prices were 3.1% higher in July than a year earlier – the highest rate since the current series of figures began in 1997. The Retail Prices Index – an alternative measure of the cost of living that acts as the benchmark for rail fare increases – was unchanged last month at 5%. Under the formula used by the government, train operating companies can increase fares by three percentage points above the July RPI inflation rate. The news on the cost of living came as a mild shock to the City, which had been expecting a more modest increase in CPI inflation to 4.3%. The failure of the Bank of England to meet the government’s 2% inflation target for more than 18 months means that Sir Mervyn King has to write an explanatory letter to the chancellor, George Osborne. James Knightley, economist at ING, said: “UK inflation numbers have come in a little higher than expected due to the fact summer discounting started earlier this year than normal – presumably down to the weakness in the economy. “This lead June’s inflation numbers to undershoot expectations, but we get a corresponding bounce back for July. Clothing and footwear inflation jumped from 1.5% to 3.1%YoY, which is the fastest rate since the series started back in January 1997. Furniture rose for similar reasons while there were also increases for financial services.” King said last week that the Bank expects inflation to climb further over the coming months as consumers are hit by rising domestic energy bills, but the Bank then expects price pressures to ease over the winter. City analysts see no possibility that Threadneedle Street will raise interest rates in response to the pick-up in inflation, and believe official borrowing costs are on hold until deep into 2012. Chris Williamson, economist at Markit, said: “The latest uptick in inflation is unlikely to add significantly to the case for higher interest rates among MPC members. Instead, policymakers are likely to continue to focus on the activity data, which are showing worrying signs of weakness.” Inflation Economics Bank of England Mervyn King Rail transport Interest rates Larry Elliott guardian.co.uk

Posted by on August 16, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.