Inflation falls but is still above target

The cost of Transport fall, but prices for food rise as inflation drops to 3.1%, but is still well over above the 2% target. Inflation dropped down in July, but remains far above the government target imposed on Bank of England.

The annualised 3.1% rise in consumer inflation for July was down on June’s 3.2% increase, but still above the 2% target. This means that the BOE governer will have to write yet another letter to the government explaining why price rises are above target.

Bank of England Governor Mervyn King blamed anumber of one-time factors, including the rise in sales tax in January, past rises in oil prices and the continued effects of higher import prices following the devaluation in the British pound since mid-2007.

King reiterated the bank’s projections that inflation will remain above the target until the end of 2011 — a year longer than it was predicting just a few months ago — but would then fall back as the effects of higher sales tax, energy price rises and import price increases drop away.

King said last week that inflation was likely to fall back below target in 2012, but in Tuesday’s letter to Treasury chief George Osborne he acknowledged that the recent strength in inflation had surprised the bank’s rate-setting committee and “how fast and how far inflation will fall are both difficult to judge.”

Transport costs were the main factor in the slight drop in inflation with the price of second-hand cars falling between June and July. Petrol prices also fell.

Conversely, food and non-alcoholic beverage prices added upward pressure on the overall figure. With the current prices rises in wheat this is likely to continue.

The same factors also saw the RPI measure of inflation – used for indexation of pensions and state benefits – drop slightly from an annualised 5% to 4.8%

The Bank of England said that inflation will stay above the 2% target for longer than it forecast back in May. The Bank’s new forecasts showed inflation above target until the end of 2011 but falling after that as ‘temporary’ factors such as the increase in VAT next year fade.

Inflation in the UK is higher than in the EU as a whole, where consumer inflation was measured at 1.9%.