The UK consumer prices index rose by 2.1% in December (chart 1). The components of this indicator had a differently directed motion. Upward pressure came largely from increases in food and clothing, as well as financial services prices.
Food prices significantly increased, due to rising prices for vegetables and bakery. A further large upward effect came from fruits, which became more expensive 1.9% m/m. In the end it contributed 0.07 percentage points to the overall CPI rate.
Clothing and footwear prices tumbled down by 0.7% y/y, thanks to a 0.8% drop in clothing prices. At that men’s and women’s outwear discounting was less than in December 2006 and thus decelerated the downturn of the prices. Positive impact of this component to the CPI rate was 0.04 percentage points. The index of various services soared by 1.9% over year, thanks to financial services, the prices of which sharply dropped down a year earlier. It contributed 0.03 percentage points to the overall CPI rate.
These increases were fully offset by a slippage of housing services, furniture and household goods prices. Housing and household services have been getting cheaper, since October 2006. Natural gas and electricity prices slightly changed, while they rose significantly in December of 2006. Only heating oil and solid fuel prices increased. Utility prices decrease subtracted 0.07 percentage points from inflation rate in the whole.
Furniture and household furnishings prices soared only by 2.5% y/y, thanks to notable drop in kitchen units, which came out from discounting. As a result, it pushed down the overall CPI rate by 0.07 percentage points.
Core CPI, excluding fuel, food and alcoholic beverages, edged down by 0.1% to 1.4% over year.
Retail prices index (RPI) and RPI excluding mortgage interest payments rose by 4% and 3.1%, respectively. The RPI is fluctuating in a tight range (table 1). One of the main components of this index, mortgage interest payments are deceasing. It was caused by gradual fall of interest rates, which rose at the same time of 2006.
The dynamics of mortgage rates reduced the growth pace of the “mortgage interest payments” to 19.8% over year. Moreover, due to relatively high mortgage loans rates and deterioration of the US and UK housing markets real estate prices dropped down. In December the growth rate of Nationwide index, which shows residential house price dynamics, tumbled down to 4.8% from 6.9% in November. It has been the lowest level since May 2006.
Negative effect from sharp reduction of utility services prices will have both short and medium term impact: natural gas and electricity prices are included in the costs of almost all goods and services. Utility price reduction was not a surprise for the market, as the possibility of natural gas prices decrease was repeatedly stated in Bank of England’s MPC minutes.
We expected worsening conditions in the UK real estate market and we didn’t err. Due to “freeze” bonds market, backed by mortgage loans which are lent to borrowers who have bad credit history or ability to prove that they have enough income to support the monthly prepayments, British banks have been experiencing difficulties to finance their liabilities. The banks financing mortgage loans through mortgage backed securities issuance, suffered more than others. These developments started reducing mortgage lending and negatively impacted the dynamics of the mortgage interest payments index. Alarmed by these developments Bank of England cut repo rate by 25 basis points and provided short term additional liquidity.
As earlier, the only source of inflation increase is gasoline, positive impact of which has a technical character (motor fuel prices rose in autumn, whereas they were falling in the same period of last year). On the basis of the above mentioned we think that further increase of CPI rate will be limited in short term. In medium term, on condition the current volume of migration from Eastern Europe remains unchanged, the US economic growth moderates and financial markets volatility remains high, domestic demand will reduce and it will weaken inflation pressure.
UK ECONOMIC INDICATORS
Table 1
|
Inflation, y/y %
|
2007
|
|
2006
|
|
Dec
|
Nov
|
Oct
|
...
|
Dec
|
Nov
|
Oct
|
|
CPI
|
2.1
|
2.1
|
2.1
|
|
3.0
|
2.7
|
2.4
|
|
RPI
|
4.0
|
4.3
|
4.2
|
|
4.4
|
3.9
|
3.7
|
|
- Mortgage interest payments
|
19.8
|
24.4
|
24.5
|
|
17.4
|
13.2
|
13.1
|
|
- Fuel
|
16.4
|
16.5
|
11.7
|
|
0.8
|
-4.6
|
-7.6
|
|
- Electricity
|
-4.5
|
-3.4
|
-1.5
|
|
27.3
|
27.1
|
27.3
|
|
- Natural gas
|
-13.2
|
-11.6
|
-8.7
|
|
40.6
|
40.8
|
41.5
|
|
RPI, excl. mortgage interest payments
|
3.1
|
3.2
|
3.1
|
|
3.8
|
3.4
|
3.3
|
Source: National Statistics Online
Chart 1
Source: National Statistics Online
