UK inflation: calm before the storm?
Tuesday, October 12, 2010 at 10:52AM
Simon Ward

CPI inflation was stable at 3.1% in September but may rise towards 4% over coming months, reflecting surging commodity prices and the VAT hike. This would squeeze consumer budgets, thereby increasing the risk of a "double dip", while making it difficult for the MPC to launch QE2. There is a strong case for postponing the VAT increase until external inflationary pressures ease.

Key factors suggesting a rise in inflation include:

In combination, these factors imply a boost of 1 percentage point or more to annual CPI inflation by early next year. A rise, therefore, looks inevitable, even assuming some slowdown in other CPI components.

One further point: CPI inflation continues to be suppressed by a suspiciously-low estimate of clothing and footwear price rises. While the RPI clothing and footwear index rose by an annual 9.4% in September, the corresponding CPI increase was just 0.9% – National Statistics, in effect, assumes that consumers are so expert at shopping around that they are able to buy the same volume for just 0.9% more than a year ago despite a 9.4% increase in label prices.

Article originally appeared on Money Moves Markets (https://moneymovesmarkets.com/).
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