Inflation & RPI: Travel pushes cost of living higher

17th May 2011

The annual increase in the consumer prices index hit a 30-month high of 4.5% in April from 4% in March, according to reports in The Guardian.

Governor Mervyn King was forced to write another letter to the chancellor, George Osborne, to explain why inflation is so far above the Bank's 2% target.

He blamed high commodity and import prices, and the increase in VAT to 20% in January.

He is reported as writing: "It is likely that had they not occured, inflation would have been substantially lower, and probably below the target."

Economists said the sharp rise in inflation could mean earlier rate rises than previously expected, although many still don't expect a move until the end of the year or early next year.

Simon Ward, chief economist at Henderson Global Investors, said the late timing of Easter depressed the March number and boosted April's reading, mainly via a surge in annual inflation of air and sea fares .

Ward expects this to reverse in May.  He added: "This effect aside, a further fall in food inflation was a favourable surprise but was offset by a pick-up in housing services, reflecting rents and water/sewerage charges."

Ward also explains that the rise in CPI inflation was not confirmed by the previously-targeted RPIX measure (i.e. RPI excluding mortgage interest costs), which eased from 5.4% to 5.3%.

"RPIX assigns a lower weight to air and sea fares and a higher weight to car insurance – premium increases are slowing. House prices and council tax, additionally, are exerting a drag on RPIX relative to CPI. RPIX inflation has tended to lead in recent years."

Mindful Money's economist blogger Shaun Richards said the increase should have come as no surprise.

He said: "I notice that rising transport costs are blamed on a special effect Easter – hardly a surprise in timing its on every calendar.

"The economics profession as it failed to forecast these numbers and has been left very wrong footed for the second month in a row. The Easter effect is well-known and again is hardly a surprise"

On Shaun Richards' blog, Janchild argues that the BOE must act to raise rates a little next month.  "Once inflation gets a substantial hold as it has now done according to all the ways of measuring it which Shaun has outlined, there is a danger of a sort of feedback loop so that the rate of increase will actually accelerate.  We are in danger of this happening now."

Fellow commentator Carys adds: "It becomes plainer with each passing month that the UK does have an inflation problem and that the body which is supposed to be our guardian is asleep."

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