Consumer Inflation in 2006
Electricity and gas push up inflation
Contribution to change in the CPI annual rate Dec 2005 to Dec 2006
During the course of 2006, the CPI inflation rate rose from 1.9 per cent in December 2005 to 3.0 per cent in December 2006. It was last higher in August 1992 when the annual rate was 3.2 per cent.
Over the course of the year, the largest upward contribution came from housing and household services. This was mainly due to rises in gas and electricity prices, particularly during the first half of the year, following sharp increases in the wholesale price of natural gas. Gas and electricity prices ended the year rising at annual rates of 40 per cent and 27 per cent respectively, having started the year at annual rates less than half these.
There were also large upward contributions, particularly during the second half of the year, from food - mainly due to vegetables and meat - recreation and culture, and education. The latter was affected by changes in undergraduate tuition fees. Fees for new entrant UK and EU students attending universities in England and Northern Ireland increased for most courses from the previous maximum of £1,175 to a new maximum of £3,000.
Over the year as a whole, transport costs had a large downward contribution with fuel prices rising in the first half of the year but falling back again in the second half. There was also a large downward effect from miscellaneous goods and services, again concentrated in the second half of the year.
The retail prices index (RPI) started the year at an annual rate of 2.2 per cent in December 2005. One year later, the rate had doubled to 4.4 per cent, the highest since December 1991. Changes in housing costs were the largest contributor to this increase.
Mortgage interest payments rose following two quarter point increases in the Bank rate during 2006, with a cut in the Bank rate in September 2005 dropping out of the 12-month comparison.
Housing depreciation - the amount home owners need to spend to maintain their property - also rose, reflecting an increase in the annual rate of growth of house prices used in its calculation, from 3.0 per cent in December 2005 to 7.5 per cent a year later. Mortgage interest payments and housing depreciation are both excluded from the CPI. Other factors contributing to the change in the RPI annual rate were similar to the CPI.
Notes:
CPI is the Consumer Prices Index. It is the measure adopted by the Government for its UK inflation target. The Bank of England's Monetary Policy Committee is required to achieve a target of 2 per cent, subject to a margin of one percentage point on either side. Prior to 10 December 2003, the CPI was published in the UK as the Harmonised Index of Consumer Prices (HICP).
The official CPI index and inflation rates, on which the above analysis is based, start in Jan 1996 and Jan 1997 respectively. Estimates for earlier periods back to 1988 are also published.
RPI is the Retail Prices Index - the uses of the RPI and its derivatives include indexation of pensions, state benefits and index-linked gilts.
Inflation is the percentage change in the index compared with the same month one year previously.
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Article: CPI Review of the Year 2006