Leader: Inflation figure masks worrying changes

Published on Tuesday 14 September 2010 11:45

Inflation may have marked time last month at 3.1 per cent, suggesting some stabilisation in a key economic measure. But little comfort can be taken. It represents yet another month when the Consumer Prices Index has run well above the Bank of England's 2 per cent target - one now effectively in abeyance.

For consumers as well as savers, this unchanged CPI rate masks some worrying changes. Food inflation is now running at 4.1 per cent, pushed higher by global commodity price pressures. Clothing manufacturers, which have experienced the fastest rate of price increases for an August since 2001, are also warning that their raw material prices are soaring. More worrying for economists, the core or underlying inflation rate, stripping out volatile food and energy prices, climbed to 2.8 per cent from 2.6 per cent in July.

This hardly suggests that inflation is the result of temporary factors as Bank of England Governor Mervyn King previously suggested. And with the planned hike in VAT to 20 per cent in January, the Governor, who is obliged to write to the Chancellor explaining an inflation rate above 3 per cent, may have his letter writing skills tested again.

Nor is there any solace for savers. A basic rate taxpayer needs to find an account paying 3.88 per cent, while a higher rate tax payer needs to find an account offering 5.17 per cent to maintain the real value of their savings. There is little likelihood of any immediate rise in interest rates. But one may come earlier than expected in the new year.