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Inflation cuts disposable income levels

POSTED: 23rd October 2013
IN: Personal News
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The latest inflation figures show a slight drop in the cost of living, with the consumer prices index (CPI) measure of inflation falling from 2.8 per cent in July to 2.7 per cent in August.

undefinedThe Office for National Statistics (ONS) said that the main contributing factor to the fall was a drop in the price of transport as air fares, petrol and diesel all increased in price at a slower pace than in August 2012.

Petrol prices went up by 3.5p a litre last August, compared to a smaller rise of 2p a litre in August 2013.

However, it is hoped fuel prices could help reduce inflation in September because wholesale petrol prices have fallen by 6p a litre since the end of August and diesel has dropped by 2p a litre.

Food prices went up by 4.1 per cent in August, providing one of the main upward inflationary pressures.

The inflation figures are based on the cost of a basket of common goods which assesses how much they have gone up in price.

At 2.7 per cent, inflation is still running at almost three times the level of average annual pay increases, which the ONS confirmed was at 1.0 per cent.

This means the squeeze on consumer spending will continue for most people as the cost of goods is rising faster than most people’s incomes.

As well as the CPI, inflation is also measured using the retail prices index (RPI) which includes the cost of renting or paying a mortgage. The RPI measure of inflation went up from 3.1 per cent in July to 3.3 per cent in August.

The Bank of England has a medium-term target of 2.0 per cent for inflation. However, inflation has been running higher than this for almost four years now, since November 2009.

Looking ahead, Dr Howard Archer, Chief UK & European Economist at IHS Global said: “Consumer price inflation is likely to hover close to 3.0% in the near term, and there remains a risk that it could yet reach 3.0% if oil prices spike up anew.

“After hovering close to 3.0% over the next few months, we expect consumer price inflation to head gradually lower.

“Our best bet is that consumer price inflation will stand around 2.7% by the end of 2013 and then trend down to end 2014 close to 2.2%.”

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