Deflation? Very nearly. The Retail Price Index (RPI), which measures inflation, dropped to zero percent in February. This is down from 0.1 percent in January and shows that the economy is moving closer to a period of deflation. The price of non imported goods and services fall in a depression, which can have a negative effect on salaries, lead to increased job losses and make it more difficult for businesses to survive. Inflation is at its lowest level since 1960.
The Retail Price Index is not the only measure of inflation. The Bank of England’s Monetary Policy Committee uses the Consumer Prices Index ( CPI ) to gauge the level of inflation. The CPI, shows that during February, inflation increased to an annual rate of 3.2 percent - up from 3 percent in January. The RPI and CPI both look at the general cost of living, but the CPI does not include housing costs - such a council tax and mortgages.
The 3.2 percent level of annual inflation, reported in the CPI, is above the Governments target of 2 per cent inflation. The Governor of the Bank of England, Mervyn King, in a letter to the Chancellor of the Exchequer, outlined the reasons why inflation is above the Governments target . A factor in February’s increase in inflation is the weakening of sterling, which has resulted in the cost of imported goods increasing. CPI inflation has dropped from 5.2 percent in September 2008 and looks likely to fall again in the coming months. Mervyn King wrote that “Despite the increase in CPI inflation in February, we believe that the sharp decline in CPI inflation since its peak in September is likely to resume in the coming months.” Mr King states that the contraction of economic activity has resulted in a large spare capacity in the economy and that the reduction of the tariffs offered by gas and electricity companies will lower inflation.
The CPI, published by the Office of National Statistics, shows that the overall cost of food and non-alcoholic beverages has risen by 11.5 percent in 12 months. Clothing and footwear has had the largest drop over the year, with a 9.3 percent decrease. The RPI reports that fuel and light had the largest 12 month increase, 22.3 percent, while the 9.5 percent decrease in housing costs was the largest negative change.
You can view the report here:
You can view the letter sent by the Governor of the Bank of England letter to Alistair Darling here:
The Chancellor of the Exchequers’ letter to Mervyn King can be viewed here: