CPI inflation above target in March – so this is deflation?

CPI inflation slowed by 2.9% per cent in March, from 3.2 per cent in February.  RPIX inflation – the all items RPI excluding mortgage interest payments – was 2.2 per cent from 2.5 per cent. It is worth remembering that CPI is the Government preferred measure of inflation and the target rate. Inflation remains above the target rate by 90 basis points. Yet, headlines are dominated by the RPI inflation result negative for the first time in fifty years at -0.4% prompting stories of deflation and depression.

Forget deflation, money supply is rising and sooner or later the velocity of circulation will begin to improve. A look beneath the headlines demonstrates the underlying resistance of price levels within the economy.

CPI based, clothing and footwear prices fell once again by 9% producing the largest move to the downside in the CPI level. Transport costs were down by 2% reflecting the fall in fuels and lubricants prices. Food prices once again remained high at 10.5%. Housing utilities, water, gas, and other fuels, were up by nearly 9%. Education costs were up by almost 9%. Furniture and household goods were higher by 3.3% and restaurants and hotels were higher by 3.4%.

Service sector inflation CPI based was 3.9% down from 4.2% compared to a 2.0% rise in goods inflation. It is difficult to reconcile high food and service sector inflation with the low projections for CPI into 2009.

The largest downward contribution to the change in the RPI annual rate came from housing costs, with the largest contribution from mortgage interest payments.

The strength of import prices, food inflation and service sector inflation suggest deflation will be elusive and the scope for quantative easing may be more limited than realised.

ONS Consumer Price Indices  March 2009
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