Unit 2 & 4: Inflation data for the UK

Excellent data from the UK highlighting the issue with inflation and how to maintain low rates whilst the economy starts to pick up....

The UK’s official inflation benchmark, the Consumer Prices Index, slid to 1.7 per cent in February – the lowest for more than four years. What are some of the main factors causing inflation to fall below target?

1. A fall in world commodity prices including lower prices for crude oil, minerals and many foodstuffs. Transport, packaging and raw material costs for many UK businesses are falling.
2. The pound has been appreciating in the foreign exchange markets. Against the US dollar, it is now at its highest level since 2009, ands this helped push down the price of imported goods and services causing an outward shift of short run aggregate supply.
3. Inflation has also fallen sharply in the USA and the euro area in the last two years. Indeed seven countries inside the single currency bloc now have consumer prices inflation rates at or below zero. Deflation is a growing risk and policy issue for the euro area.
4. Wage inflation in the UK labour market remains subdued with the annual growth of pay remaining close to just 1%
5. Lastly, the recent UK Budget announced some reductions in indirect taxes / duties and the net effect on the CPI inflation rate is estimated by some economists to reduce inflation by 0.5% in the coming months.

UK sterling exchange rate and CPI inflation

So for now the rate of inflation in the UK is comfortably below the 2% target measure. The crucial question is whether inflation can remain under control as the economy gathers momentum and the rate of growth of real GDP picks up towards trend rates or above. The search for non-inflationary growth has been a key macro policy objective for many years - it will remain so well beyond the end of this Parliament.