BANK of England Governor Mervyn King was rattled yesterday after the latest UK inflation figures showed that prices are still soaring.
Although the figures for the Consumer Prices Index (CPI) showed a slight fall in the inflation rate, from 3.2 per cent in June to 3.1 per cent in July, the CPI index is still more than one per cent above the Bank’s target and food prices are continuing their rapid rise and petrol prices remain very high.
The Retail Prices Index (RPI) was 4.8 per cent for the month of July, compared to five per cent in June, the Office for National Statistics (ONS) said.
But, according to the ONS, average earnings in the year to June only rose by 1.3 per cent – which means they have fallen dramatically in real terms when compared to the inflation figures.
Bank chief King has been forced to write to the Tory Chancellor of the Exchequer, George Osborne, explaining why he thinks inflation is still above target.
In his letter, King tried to reassure the government that, although the Bank of England’s Monetary Policy Committee (MPC) had been ‘surprised’ by the recent strength of inflation, this was largely due to ‘temporary’ factors.
These included the return of VAT in January to 17.5 per cent, following a 2.5 per cent cut, past rises in oil prices and higher import prices as a result of the fall in the exchange rate of the pound since 2007.
Yet Tory Chancellor Osborne has announced plans to raise VAT even further, to 20 per cent from January 2011, while crude oil continues to trade at more than $75 a barrel and the pound has barely recovered to above $1.50, which means the cost of imports continues to remain high.
King was forced to admit to Osborne that ‘there remains a significant probability that I will need to write further open letters to you in the coming months’.
Osborne agreed there were ‘significant uncertainties about the inflation outlook’.
The July inflation figures are watched particularly closely, as they are used to set rail fare increases for the following year.
Passenger Focus has urged the private train operators to show restraint after reports that the Department of Transport will allow the privateers to set season ticket prices at July’s RPI plus three per cent.
This could mean rail fare rises of 7.8 per cent, or even more if the private operators are given further concessions to compensate for cuts in government subsidies.
Southeastern Trains has already been told it can raise regulated fares by the RPI plus three per cent.
In addition to rising bus and train fares, the increasing cost of food will further anger workers, while the price of petrol at the pumps remains at around £1.20 a litre.
The main upward pressures to inflation between June and July came from air transport, where fares rose sharply on long-haul and domestic routes, and food and non-alcoholic drinks, where prices rose by 1.0 per cent overall, a record for a June to July period.
The CPI annual inflation rate has been running at over 3.0 per cent since the beginning of this year.
The price of fuels and lubricants has shot up by 14.3 per cent in the 12 months since July 2009.
Air fares have shot up by 14.8 per cent in the last year.
The end of seasonal summer discounts will lead to further price rises on many items in the autumn.
Information disclosed yesterday under Freedom of Information also shows a number of products are not included in the inflation figures, including iPhone applications.