The consumer prices index rose by 2.5% in February. Upward pressure came largely from increases in household services, cigarettes and recreation goods prices.
The sharp rise in price of household services was favored by the following factors: a change in the methodology used to compile this index and a significant rise in natural gas and electricity prices. As a result the latter’s cost increased more than by 10% in a monthly basis. However, heating oil and solid fuel prices changed slightly. Utility prices contributed 0.36 percentage points to the inflation rate.
Recreation goods prices edged up by 0.2% y/y, thanks to a rise in audio-visual equipment and accessories, while games and toys fell in price. Alcoholic beverages and cigarettes prices soared by 1.2% over month, thanks to a notable rise of cigarette prices. This detrimental to health product became expensive by 4.2% y/y. As a result, it pushed up the overall CPI rate by 0.03 percentage points.
These increases were partially offset by a decrease of food, transportation and various services prices. After a prolonged rise food significantly became cheaper, due to 2.8% decrease of fruit prices, while they rose in price by 0.7% in February of last year. Vegetable prices growth rate was several times lower, than a year earlier. In the end it subtracted 0.05 percentage points to the overall CPI rate.
Despite higher prices of oil the pace of transportation component growth decelerated. According to ONS data in the UK the average price for gasoline recorded across February rose by 0.1 pence a little bit higher than one pound per liter, compared with a fall of 0.3 pence a year ago. Negative impact of the latter was expanded by a downward contribution from transportation services prices. Combined impact of transportation component on the overall CPI rate was 0.03 percentage points.
Core CPI, excluding fuel, food and alcoholic beverages, edged down by 0.1% to 1.2% over year.
Retail prices index rose by 4.1% y/y. This index is fluctuating in a tight range (table 1). One of the main components of this index, mortgage interest payments are decreasing. 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 11.8% over year. Moreover, due to deterioration of the US and UK housing markets real estate prices are dropping down. In February the growth rate of Nationwide index, which shows residential house price dynamics, tumbled down to 2.7% from 4.2% in January. It has been the lowest level since November 2005.
The reduction of utility services prices will have medium term impact on inflation: natural gas and electricity prices are included in the costs of almost all goods and services. Utility price sharp increase was not a surprise for the market, as it is mostly related to the change of this index methodology.
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 (chart 1).
UK ECONOMIC INDICATORS
Table 1
|
Inflation, y/y %
|
2008
|
|
2007
|
|
Feb
|
Jan
|
Dec
|
...
|
Feb
|
Jan
|
Dec
|
|
CPI
|
2.5
|
2.2
|
2.1
|
|
2.8
|
2.7
|
3.0
|
|
RPI
|
4.1
|
4.1
|
4.0
|
|
4.6
|
4.2
|
4.4
|
|
- Mortgage interest payments
|
11.8
|
15.6
|
19.8
|
|
21.9
|
17.9
|
17.4
|
|
- Fuel
|
20.3
|
19.0
|
16.4
|
|
-3.8
|
-2.0
|
0.8
|
|
- Electricity
|
5.2
|
-4.6
|
-4.5
|
|
25.7
|
26.7
|
27.3
|
|
- Natural gas
|
-2.2
|
-13.2
|
-13.2
|
|
39.8
|
39.9
|
40.6
|
|
RPI, excl. mortgage interest payments
|
3.7
|
3.4
|
3.1
|
|
3.7
|
3.5
|
3.8
|
Source: National Statistics Online
Chart 1
Source: National Statistics Online
