UK inflation rises again. Will Carney have to write a letter?

Posted: June 18, 2013 in Inflation, United Kingdom
Tags: , , , ,

It’s not long now. Mark Carney will be settling into his new job as the governor of the Bank of England in a few weeks’ time. Alas, if the latest inflation data is any guide, one of his first tasks may be to write to George Osborne explaining why inflation is more than a whole percentage point over target.

According to the ONS, UK inflation was 2.7 per cent in May, from 2.4 per cent the month before. The largest upward contributions to the change in the rate came from transport and clothing. In fact airfares’ inflation rose from 0.8 to 21.3 per cent.

The largest downward contribution came from food.

Core inflation – that’s with food, energy and tobacco taken out – was 2.2 per cent in May, higher than in April but lower than in February and March.

But there was good news. Between April and May total input prices fell 0.3 per cent, compared with a fall of 2.3 per cent between March and April. Between April and May factory gate prices were unchanged, compared with a fall of 0.2 per cent between March and April.

Over the next few months, headline inflation will probably rise and may well rise over 3 per cent, eliciting Mr Carney’s first Dear George letter. But as the data on producer prices demonstrate, the underlying pressures are downwards, meaning inflation is expected to fall back later in the year, although of course we have heard this many times before.

Here is a theory for you to ponder, and by the way not one you will read elsewhere.

What impact has the internet had on inflation, do you think? By promoting such fierce price competition, it may have been a far more important factor behind the low inflation of the last ten years or so, than it is generally acknowledged. Take the internet effect on air flights, for example. It was surely pretty significant.

But was the internet effect a one off? Has the price competition it has enforced run its course? The fact that airfares have risen so sharply may suggest it has.

© Investment & Business News 2013

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