Once again we get validation that the ever accelerating stagflationary episode in the UK is taking far more than 15 minutes to sort out. Today, as MNI reports, consumer prices rose at their fastest pace on record
in April as the timing of Easter saw airfares rise sharply, according to
figures released by National Statistics Tuesday. Naturally, there has to be some seasonal offset in there somewhere, just like there was in the month prior, and the month before. Oddly, the Royal wedding was not implicated. From the BBC: "The rise was due to a jump in transport costs, particularly Easter rises in air and sea fares, and alcohol and tobacco. However, the Retail Prices Index (RPI) measure of inflation - which includes mortgage interest payments - fell slightly to 5.2% from 5.3% in March. The rise in CPI was bigger than analysts had forecast and follows a surprise fall in the index last month. CPI is now at its highest level since October 2008. The Office for National Statistics (ONS) said "by far the largest upward effect" on prices came from air transport, where fares rose by 29% between March and April. Sea fares rose by 22.3%. It said the fact that Easter was in April this year but in March last year partly explained the jump in prices." As to how people are coping with the fact that they can buy increasingly less, Easter or no Easter, "Alcoholic drinks and tobacco rose by a record 5.3% in April."
Presenting this visually:
Naturally, this has implications for the GBP, now that central banks define monetary policy based on month to month swings in CPI readings:
The governor of the Bank of England Mervyn King was forced to write a letter to the Chancellor George Osborne explaining why the inflation rate was more than 1% above the Bank's target rate of 2%.
He reiterated his view that high inflation was due to the "increase in VAT to 20% in January, higher energy prices and increases in import prices".
April was the 17th month in a row that the inflation rate was at least one percentage point above target, and the governor has to write to the chancellor every three months while it remains so.
Higher fuel bills
In March, inflation had fallen to 4% from 4.4% in February.
The return of accelerating price rises after March's respite will put further pressure on the Bank of England to raise rates sooner rather than later.
"April's rise in CPI inflation confirms that March's drop was just a temporary reprieve - inflation will probably get to 5% or above over the coming months," said Vicky Redwood at Capital Economics.
Last week, the Bank of England said it expected inflation to hit 5% later this year, largely due to higher utility bills.
It still expects inflation to fall back towards the Bank's target rate of 2% towards the end of next year.
The increasing pressure to raise rates following the jump in inflation was reflected in the currency markets, where the pound rose by more than half a cent against the dollar to $1.6285, and by almost 0.4 cents against the euro, to 1.1460 euros.
However, some analysts argued that this month's figures meant little in the context of longer-term price rises.
"Almost all of the pick-up in CPI inflation was due to higher transport costs caused by the timing of Easter, and this is likely to unwind next month," said Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club.
"Abstract from this issue and the picture is little changed and there are few implications for policy."
He does not expect the Bank to raise rates before November at the earliest.
And Goldman's take:
UK CPI: Highest for 2½ years, but upside surprise almost entirely driven by 'Easter effect'
BOTTOM LINE: Following the downside surprise in March, inflation surprised on the upside in April (Chart 1). CPI inflation rose from +4.0%yoy to +4.5%yoy - it's highest rate since October 2008 and considerably higher than expectations (GS: +4.2%, Cons: +4.1%). However, according to the ONS, the timing of Easter accounted for almost all of the upside surprise: three measures of travel costs in the CPI index (which, due to the price collection methodology used by the ONS, are particularly sensitive to the timing of the Easter Holidays) together contributed 0.36%pts to the 0.5%pt increase in annual inflation between March and April. This upward effect should fall out of the comparison in May, although other effects are likely to contribute positively.
1. As the ONS highlighted, the timing of Easter in 2011 - and its impact on measured travel costs - was the most significant driver of the 0.5%pt increase in year-on-year inflation in April. Taken together, the prices of air transport, sea transport and international rail travel contributed 0.36%pts to the increase in annual CPI inflation between March and April. This is largely a statistical base effect rather than an indication of underlying cost pressure: while Easter Sunday in 2010 fell in the first week of April - and so missed the collection period for the April 2010 CPI entirely - Easter Sunday in 2011 fell on April 24 (within the price recording window). As a result, this year, the return legs of the representative trips used by the ONS to capture the prices of air, sea and rail travel in April fell within 'peak' school holiday periods, thus causing elevated rates of year-on-year inflation to be registered in the travel cost components of the CPI and RPI indices.
2. Against the upward effect on inflation from the timing of Easter, petrol and diesel prices exerted downward pressure on headline inflation. Fuel prices rose by less in April 2011 than in April 2010, partly due to the recent decrease in excise duty compared with the increase this time last year.
3. One measure of 'core' inflation calculated by the ONS hit a record high in April. CPI inflation excluding energy, food, alcohol and tobacco rose from +3.2% to +3.7%yoy - the highest rate recorded since the series began in 1997.
4. With the upside surprise in April CPI inflation stemming from an idiosyncratic statistical effect, our view of the medium-term path for inflation is unchanged (we will send out an updated monthly path in due course). In last week's Inflation Report, the MPC revised up both its inflation forecast for the coming year as well as its projections for 2012 (and, to a lesser extent, 2013). In our view, January's VAT hike will continue to have an upward effect on inflation through the duration of the year and, combined with a rising contribution from commodity and food prices, we expect CPI inflation to remain above 3½% through most of 2011. In the medium-term, however, as these same factors begin to drop out of the 12-month comparison through the turn of the year, we expect the decline in annual CPI inflation in early 2012 to be sharp. That said, in light of this morning's surprise, the MPC's warning of a "significant risk that inflation would exceed 5%" in the coming months remains pertinent.
It is sad that central banks have completely lost control on what was once the reason for their existence, namely "price stability" - judging by the surging amplitudes in inflation and other indicators, it is obvious that stability is the last thing that modern economies have.