Week 37, 2011: UK Inflation

Summary: Inflation continues to prove a problem for the UK economy as August sees it rise to 4.5%. The Bank of England have plenty of room for manoeuvre though, when the time comes for them to act.

What does the chart show? The blue line is the percentage change on the same month in the previous year of the Consumer Price Index (CPI) measure of inflation. The red line shows the "base" interest rate that the Bank of England sets each month, which in theory influences all other interest rates in the economy and therefore saving and borrowing behaviour.

Why is the chart interesting? After falling off slightly during June and July, the CPI is back up to 4.5% and looking to head towards the recent peak of September 2008. If it does break the 5% barrier, the Bank of England will come under further pressure to raise the base rate from 0.5%. Whether it will follow through or not will likely depend on how growth figures look for the rest of the year.

An interesting side note is that "Core CPI", or CPI excluding food and fuel (probably two of the most relevant prices to the consumer, but also the most sensitive to exogenous shocks) was only at 3.1% in August. The cost of food and fuel have therefore been pulling the index upwards, which is likely to hit normal people particularly hard.