Inflation slows but reprieve may be temporary

The Momentum UK Team 21 May 2013

Falling inflation levels reported by the Office for National Statistics may serve to ease pressure on household budgets and savers alike, but it may only be a temporary reprieve.

Inflation levels fell to 2.4% in April compared to 2.8% recorded in the previous month according to latest statistics from the Consumer Price Index.

According to the Office for National Statistics who publish new CPI figures each month, the greatest contributors to the fall in inflation were falling transport costs, while the cost of food and alcohol saw the most significant rise.

The April figures showed the first slow-down in inflation since Autumn 2012.

Inflation is a measure of the rising cost of living across a period of time. In order to calculate this the ONS tracks the changing cost of a varied selection of goods and services. The CPI does not take into account housing costs.

CPIH, a new measure of inflation which takes into account the rising cost of housing, rose by 2.2% in April compared to 2.6% in the previous month. This is lower than the CPI because the cost of housing rose more slowly than overall inflation.

Azad Zangana, Schroders' European Economist said:

“The fall is attributed to lower fuel prices, as falls in global oil prices have fed through to lower prices on forecourts. In addition, smaller increases in duties from the Chancellor's budget compared to a year ago also contributed to the fall in prices. Core inflation (excluding food and energy) also fell from 2.4% to 2% - falling to its lowest rate since November 2009.”

“The fall in March's annual inflation rate will come as a relief to households, who on average are only seeing 0.4% increases in pay compared to a year ago. Unfortunately, the fall in inflation should be temporary. Looking ahead, next month's inflation release will also include further falls in energy prices, however, these are unlikely to continue, which is likely to push inflation higher again in following months.”

Meanwhile the Alliance Trust Economic Research Centre highlighted that inflation may have a more significant impact on older age groups who use certain goods and services more.

According to their report, those aged 75 continue to face the highest level of inflation, recorded as 2.9% in the month of April, with the rising cost of gas and electricity as contributing factors.

Shona Dobbie, Chief Economist at Alliance Trust, said:

"Our analysis shows that the over 75s continue to suffer the highest rate of inflation. The oldest households spend relatively more of their budget on basic goods and services, and this has left their inflation rate elevated. We estimate that this age group spends more than 23% of their budget on food, gas and electricity, compared with just 16% in the case of 30-49 year olds.

“As a result, in April, the elderly did not benefit as much as other age groups from the fall in headline inflation. The elderly suffered an inflation rate which was significantly higher than the headline rate of inflation; in fact the gap between these two rates was the largest in almost a year.”

Those in the age groups ranging from 30-74 saw the lowest level of inflation at 2.1% according to the report.