UK Inflation: A Modest Decline

Inflation fell fell slightly in January to 3%, from 3.1% in December. Economists were surprised having expected a fall to around 2.7%. Rises in the price of household equipment, such as furniture, clothing and footwear, nearly all imported and bought with a very weak pound, have offset falling prices in energy bills. The energy bills didn’t fall nearly enough. Neither did fuel, which missed out on the VAT cut. Alcohol prices have risen, pushed up by tax increases.

Retailers, as we long suspected, did not continue slashing prices beyond the point where they made any profit, opting for a longer term strategy of lower sales/higher profits. They have also reduced stock levels. There is not that much stock to clear. Food prices remain quite high.

Inflation will come down this year, but its going to take longer than the MPC think. { predicted CPI inflation will drop to 0.5% this year and will remain below its 2% target for two years.} The rush to slash prices at Christmas, when the heaviest footfall is recorded is completely understandable. To have expected retailers to continue slashing prices when footfall is at its lowest point is less understandable. Prices will fall,along with inflation at quarter two, with the sell off of the quite large stocks of 2008’s summer goods, unsold due to the second lousy summer in a row, and the very start of the fell bad factor.

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