Business

UK inflation rate nudged up to 2.8% by rising fuel costs

UK inflation as measured by the Consumer Prices Index rose to 2.8% in February from 2.7%, thanks in part to rising energy prices, according to the Office for National Statistics (ONS).

Other upward price pressures came from recreational goods, such as cameras and computer games, the ONS said.

The Retail Prices Index (RPI) measure fell to 3.2% in February, from 3.3% in January.

The Bank of England's inflation target for the CPI is 2%.

The ONS said the largest upward contributions to the change in the CPI measure of inflation came from domestic fuel bill increases, which had been expected, as well as prices for cameras and games, where competition, which had been fierce, has abated.

The ONS also published for the first time new experimental inflation measures, after concluding last year that the calculation used to produce the RPI figures was not up to scratch.

For the sake of continuity, it is still publishing RPI, which is used for uprating regulated train fares, private pensions and some index-linked investments. But it has lost its status as an official national statistic.

Had it used formulae that met international standards, RPI would have been 0.6 percentage points lower, the ONS said. That suggests that recent rises in train fares may not have been as high, but the value of some investments would also have risen more slowly.

Under the new measure, RPIJ, the annual rate of inflation in Feburary was 2.6%, down from 2.7% in January.

Pound weakness

Most economists think price rises will continue climbing in the coming months, partly due to the weakness of the pound, which has fallen 7% so far this year and makes buying goods in other currencies more expensive.

Vicky Redwood of Capital Economics predicted CPI would rise to 3.5% this summer, with food and petrol costs expected to rise further: "While it should ease back thereafter, the rise in import prices likely to result from the recent fall in the pound could slow that fall."

The Treasury, which is preparing to announce this year's Budget on Wednesday, said that the increase in CPI was "in line with market expectations", adding that it had fallen by almost a half from its peak of 5.2%.

Inflation running higher than target makes life harder for the government as it tries to balance the books, as assumptions made about spending can turn out to be too low.

There are reports that Chancellor George Osborne will alter the 2% inflation target mandate set for the Bank of England's interest rate-setting Monetary Policy Committee in his Budget.

Mr Osborne is under pressure to provide a boost to the flagging UK economy.

One change could be that he orders the Bank to pursue a dual target of managing inflation and economic stability, giving it more time to hit the target without strangling growth through increased interest rates.

In reality, the Bank already appears to be relaxed about inflation, which it has said it expected to continue to be above target until 2016.

New broom

The Bank of England will have a new governor in the summer when Mark Carney, currently Canada's central bank governor, takes over from Sir Mervyn King.

Mr Carney is understood to want to take a wider view of managing the economy, rather than simply focussing on inflation.

David Kern, chief economist at the British Chambers of Commerce, said this could further weaken the pound: "Caution is needed before we embark on any policies likely to result in further declines in sterling and higher inflation," he said.

"In recent years, persistent above target inflation has squeezed businesses and consumers and has been one of the main factors accounting for the slower growth than predicted by the OBR [Office for Budget Responsibility] in 2010. The MPC must not give the impression that it is prepared to tolerate higher inflation in the foreseeable future."

High inflation is also damaging for savers.

Sylvia Waycot, editor at Moneyfacts.co.uk, said: "To beat inflation, a basic rate taxpayer at 20% needs to find a savings account paying at least 3.5% per annum, while a higher rate taxpayer at 40% needs to find an account paying at least 4.66%."

She added that of almost 900 savings accounts currently available, none provided that rate of return and only five cash ISAs on offer were offering rates that would beat inflation.

'Flawed'

Both RPI and CPI measure changes in prices, but track slightly different baskets of goods and services and use different methods to calculate inflation.

Since its launch, CPI has tended to be lower than the RPI, although the two have broadly moved up and down in line with each other.

Last year the UK's national statistician examined how the RPI was calculated and whether it was measuring price changes accurately. Bank of England governor Mervyn King said it was "flawed".

But although it has lost its "quality mark" - a badge that shows the authorities think it is "fit for purpose", it is still being used as the basis for setting some private pension payments.

The ONS said RPI would also continue to be used for long-term index-linking for gilts and bonds.

The new RPIJ measure is an attempt to gauge how accurate the RPI itself is. The other new measure, CPIH, which includes housing costs, was 2.6% in February, up from 2.5% and slightly below the headline CPI rate.

RPIJ will be watched in the coming months and compared with RPI, but it is not clear what the RPIJ will be used for, if anything.

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