UK inflation rises to 3.1 per cent

CPI annual inflation – the Government’s target measure – was 3.1 per cent in March, up from 2.8 per cent in February, latest figures from the Office for National Statistics show.

The largest upward effect on the CPI annual rate came from food and non-alcoholic beverages. Shop-bought milk prices increased by over 2 per cent in March, compared with a fall of around 8 per cent last year when supermarkets cut prices. Small upward effects came from bread and cereals and meat, where prices rose in March but fell a year ago. A partially offsetting downward contribution came from fruit, as prices fell by more than a year ago.

Further large upward contributions came from:

Furniture, household equipment and routine maintenance, where the monthly increase in prices for furniture and furnishings in March was a record at around 10 per cent, and from major household appliances, where prices rose in March but fell a year ago;

Recreation and culture, where prices for computer games increased this year contrasting with decreases in March 2006, and cultural services, where admission prices for theatres and live music events rose in March but fell last year;

Transport, where petrol prices rose by nearly 2.5 pence per litre in March compared with little change a year ago.

A large downward effect on the CPI annual rate came from housing and household services, mainly due to gas and, to a lesser extent, electricity. Gas prices fell over the month and electricity prices showed little change. In March 2006, tariffs for both gas and electricity rose by around 3 per cent.

RPI inflation rose to 4.8 per cent in March, from 4.6 per cent in February and was influenced by many similar factors to those that affected the CPI. Housing costs that are excluded from CPI had a small upward contribution to the change in the RPI annual rate, mainly due to depreciation costs, which rose this year but fell a year ago, reflecting movements in the smoothed house price index used to calculate this component.

RPIX inflation – the all items RPI excluding mortgage interest payments – was 3.9 per cent in March, up from 3.7 per cent in February.

As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate is above average for the European Union as a whole. The provisional inflation rate for the EU 27 in March was 2.2 per cent, compared with the UK rate of 3.1 per cent for the corresponding period.

Barry Naisbitt, Chief Economist at Abbey, commented: “Today's figures on inflation were an unpleasant surprise.

“Consumer price inflation at 3.1% is at its highest since comparable records began in 1997 and is outside its target range for the first time since the Monetary Policy Committee (MPC) was formed. Retail price inflation rose to 4.8%, the highest since July 1991. The pick up in inflation came not just from higher oil prices but also from food and furniture prices, amongst others.

“Back in January, with inflation at 3%, the Governor of the Bank of England noted that if it rose a fraction further he would have to write an open letter to the Chancellor explaining why it had risen and what measures the MPC were taking to bring inflation back to its 2% target. He will now have dusted down his pen for that letter. Certainly, financial markets have now firmed up their view of another base rate rise next month. The Bank of England's Inflation Report next month will be critical in informing markets of the extent to which the Bank still expects inflation to fall in the second half of this year after today's unexpected figure.”