The UK consumer prices index rose by 2.2% in January (chart 1). Upward pressure came largely from increases in fuel and food, as well as furniture prices.
High oil prices significantly quickened the growth pace of transportation component. According to ONS data in the UK the average price for gasoline recorded across January rose by 1.3 pence to 1 pound per liter, compared with a fall of 0.8 pence a year ago. Positive impact of the latter was expended by a downward contribution from transportation services prices. In particular air tickets became cheaper by 19.4% on a monthly basis. Nevertheless, transportation component pushed up the overall CPI rate by 0.10 percentage points.
Food significantly rose in price, due to 3.2% decrease of fruit prices, while they became cheaper by 6% in January of last year. In the end it contributed 0.07 percentage points to the overall CPI rate. Furniture and household furnishings prices tumbled down by 8.7% m/m, thanks to a notable drop in kitchen units, which came out from sales/discounts. However, discounts were less than the previous year. As a result, it pushed up the overall CPI rate by 0.05 percentage points. Natural gas and electricity prices went slightly up, while they rose significantly at the beginning of 2007. However, heating oil and solid fuel prices notably increased. Utility prices contributed 0.03 percentage points to the inflation rate.
These increases were partially offset by a slippage of clothing and various services prices. Clothing and footwear prices tumbled down by 5.2% y/y, thanks to a 5.5% drop in clothing prices. At that both clothing and footwear discounts were more than in January 2007 and thus accelerated the downturn of the prices. Negative impact of this component to the CPI rate was 0.07 percentage points. The index of various services fell by 0.1% over year, thanks to financial and hairdressing services, which subtracted 0.03 percentage points from the overall CPI rate.
Core CPI, excluding fuel, food and alcoholic beverages, edged down by 0.1% to 1.3% over year.
Retail prices index (RPI) and RPI excluding mortgage interest payments rose by 4.1% and 3.4%, 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 2007. The dynamics of mortgage rates reduced the growth pace of the “mortgage interest payments” to 15.6% over year. Moreover, due to deterioration of the US and UK housing markets real estate prices are dropping down. In January the growth rate of Nationwide index, which shows residential house price dynamics, tumbled down to 4.2% from 4.8% in December. It has been the lowest level since February 2006.
The 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 50 basis points and provided short term additional liquidity.
As earlier, the only source of inflation increase is gasoline, which rise in price has a political character. 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 %
|
2008
|
|
2007
|
|
Jan
|
Dec
|
Nov
|
...
|
Jan
|
Dec
|
Nov
|
|
CPI
|
2.2
|
2.1
|
2.1
|
|
2.7
|
3.0
|
2.7
|
|
RPI
|
4.1
|
4.0
|
4.3
|
|
4.2
|
4.4
|
3.9
|
|
- Mortgage interest payments
|
15.6
|
19.8
|
24.4
|
|
17.9
|
17.4
|
13.2
|
|
- Fuel
|
19.0
|
16.4
|
16.5
|
|
-2.0
|
0.8
|
-4.6
|
|
- Electricity
|
-4.6
|
-4.5
|
-3.4
|
|
26.7
|
27.3
|
27.1
|
|
- Natural gas
|
-13.2
|
-13.2
|
-11.6
|
|
39.9
|
40.6
|
40.8
|
|
RPI, excl. mortgage interest payments
|
3.4
|
3.1
|
3.2
|
|
3.8
|
3.8
|
3.4
|
Source: National Statistics Online
Chart 1
Source: National Statistics Online
