UK Inflation Rate Eases to 3%

Inflation in January registered a much larger year-on-year rise than many economists had expected, given falling costs of fuel and housing and the rising slack apparent elsewhere in the UK economy., Financial Times 2/17/2009 5:29:52 AM

The consumer prices index rose in January at a year-on-year rate of 3 per cent, down from a 3.1 per cent rate in December, official figures showed on Tuesday.

But retail prices – the measure of inflation felt by most households – defied economists’ expectations of negative growth, registering a 0.1 per cent year-on-year rise in January as rising prices of household goods offset some of the impact of falling mortgage interest payments.

Since peaking in September last year at an annualised rate of 5.2 per cent, CPI has declined steadily. However, the drop in January was much less dramatic than that seen in earlier months.

The Office for National Statistics said that the biggest driver of the drop in CPI came from the price of fuels and lubricants, which fell this year but rose last year. The average price of petrol fell by 2.9p a litre between December 2008 and January, compared with one year earlier when petrol rose by an average of 1.3p a litre. Diesel prices fell an average of 4.0p a litre against a rise of 1.3p last year.

Meanwhile, overall rental charges fell slightly this year compared with a year ago and the electricity and heating oil components of housing costs also recorded a drop. In January 2008, these were rising.

House prices and interest on mortgages are excluded from CPI but do show up in RPI, where the falls recorded were the biggest single contributor to the drop in retail prices in January.

The ONS noted that most lenders passed on at least part of the 1 percentage point cut in the Bank of England’s reference rate in December while house price depreciation, as measured by a government index, also contributed.

A decline in motoring expenditure – not only the drop in fuel prices but the drop in car prices – also helped RPI to decline from its 0.9 per cent year-on-year rate recorded for December.

But offsetting these price declines was a large upward effect from household goods. Furniture prices fell by less this year than they had last year, while household appliances prices rose this year after having fallen in January 2008.

A further large rise in the cost of alcoholic drinks also helped offset some of the downward effect of falling house and fuel prices.

UK house prices fell by 10.2 per cent in December 2008 compared with a year earlier, the Department for Communities and Local Government reported on Tuesday.

Prices fell by 2.3 per cent in December alone to an average of £195,317 compared with £219,591 a year ago.

Prices were down 6.4 per cent in the final quarter of 2008, against a 3 per cent drop in the three months to September, DCLG said.

UK Inflation Rate Eases to 3%