Inflation more expensive than BoE expected

Data released recently by the ONS (Office for National Statistics) showed annual Consumer Price Index (CPI) inflation at 2.7% in January.

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It is unchanged from the previous three months and is the longest period of time for which annual CPI growth has remained unchanged. As a result, inflation continues to exceed the Bank of England’s central target of two percent.

Housing and household services including items such as rent and home energy costs showed the greatest increase on the headline rate at 3.5% year on year. The price of food as well as non-alcoholic beverages of 4.2% also had a substantial effect. Both the above contributed 0.5 percentage points to the overall annual inflation rate.

When looking at single price rises, education increased by 19.7% year on year with September’s tuition fee hike having an on-going effect on year-on-year price comparisons.
Alcohol and tobacco recorded the next largest increase with prices in this group rising by 8.5% over the year to January 2013.

Colin Edwards, Economist, Centre for Economics and Business Research said:
“While the inflation rate may be holding steady, it remains near the upper end of the Bank of England’s CPI inflation target (the Bank is allowed a range of 1.0 percentage points above or below the central 2.0% target). The Bank will present its quarterly inflation report tomorrow morning, containing its latest outlook for inflation and growth in the UK economy. For 2013 at least, we expect to see the Bank revising up its inflation expectations.”

“The Bank’s November 2012 inflation report had factored in consumer prices increasing at a rate of 2.6% year on year in the first quarter of 2013 and peaking at 2.7% in Q2. Today’s figures therefore show prices in the economy are rising more sharply than the Bank had forecast. And with the effects of increased tuition fees set to persist throughout much of 2013, combined with elevated food prices and rising utility costs, inflation will struggle to come down significantly this year, pointing to 2013 becoming a more expensive year than the Bank expected.”

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