More gloom for households as inflation edges up again

Inflation is set to show a rise to around 4.4 per cent tomorrow, after a short-lived decline in the rate to 4.2 per cent in the previous month’s figures.

The increase for July is part of a trend that the Bank of England’s Governor Sir Mervyn King expects will see inflation reach five per cent by the end of the year as steep rises in electricity and gas prices come into effect.

With the UK facing a period of continued sluggish growth, the Bank then expects inflation to fall below the two per cent target to 1.8 per cent in two years time, particularly as the impact of this year’s VAT increase falls out.

Tomorrow’s figures will be closely watched by rail travellers as July’s Retail Price Index (RPI) number, which unlike CPI also includes housing costs, is the basis on which rail fares for next year are based.

The formula is RPI plus three per cent and it sets the price for regulated fares which includes season tickets. RPI is set to remain at around five per cent.

The bigger-than-expected fall in last month’s figure reflected retailers cutting prices in response to the tightening squeeze on household incomes.

While there has been little respite on the high street, the comparative figure for July 2010 was weak and will force up this year’s rate.

Victoria Cadman, an economist at Investec Securities, says lower food and petrol prices will limit the rise this month, with recent data from the British Retail Consortium showing prices fell by 0.6 per cent in July from June.

Oil prices have also fallen, with some of the main supermarkets cutting their forecourt prices, while motoring organisation the AA indicated prices of both petrol and diesel had eased a little.

If the figures come in as expected, July will be the 20th month running that CPI will have missed the Bank of England’s target of two per cent, prompting Sir Mervyn to write a letter to Chancellor George Osborne explaining why inflation remains so far above its target.

Nida Ali, economic advisor to the Ernst & Young ITEM Club, said last week’s inflation report by the Bank of England “makes it evident that the Bank’s primary concern is to restore the health of the economy rather than tackle the high levels of inflation in the short term”.

Wednesday will also see the publication of the minutes of the Bank’s Monetary Policy Committee meeting, with economists keen to see whether those voting for a rate increase moved back into the pack.

“While not being as explicit as the Fed, the MPC have clearly indicated that they are not raising rates this year,” said Yorkshire Bank economist Tom Vosa.