CPI annual inflation – the Government’s target measure – was 2.9 per cent in December, up from 1.9 per cent in November.
The increase in the CPI annual rate of 1.0 per cent between November and December 2009 is the largest ever increase in the annual rate between two months. This record increase is due to a number of exceptional events that took place in December 2008:
the reduction in the standard rate of Value Added Tax (VAT) to 15 per cent from 17.5 per cent
sharp falls in the price of oil
pre-Christmas sales as a result of the economic downturn
These exceptional events led to the CPI falling by 0.4 per cent between November and December 2008 (a record fall between these two months). The CPI increase between November and December 2009 of 0.6 per cent is far more typical (the CPI increased by 0.6 per cent between November and December in both 2006 and 2007). These exceptional events also affected the change in the RPI annual rate.
The upward pressures to the change in the CPI annual rate in December 2009 are widespread with 10 of the 12 divisions having upward effects. The largest upward pressures are from:
Transport - within this division the largest upward effect came from fuels and lubricants where prices rose by 0.2 per cent between November and December this year compared with a fall of 6.2 per cent a year ago. The 6.2 per cent decrease was the second largest monthly fall in fuels and lubricants on record and was due to sharp falls in petrol and diesel prices, reflecting the falling price of crude oil in the latter half of 2008. Within transport there was also large upward pressure from the purchase of new cars where prices rose slightly this year but fell a year ago. The 2.1 per cent decrease between November and December 2008 was the third largest monthly fall in the price of new cars on record and was largely due to the reduction in the VAT rate in December 2008 to 15 per cent from 17.5 per cent.
Clothing and Footwear - where prices fell between November and December this year but by less than a year ago with the largest upward effect coming from women’s outerwear. The reduction in the VAT rate contributed to the larger than usual decrease between November and December 2008 in the price of clothing and footwear (the 4.2 per cent fall was the largest ever between these two months); additionally, retailers also reported very poor trading due to the challenging economic conditions and this led to greater discounting than usual.
There were no significant downward pressures to the change in the CPI annual rate.
In the year to December 2009, RPI annual inflation was 2.4 per cent, up from 0.3 per cent in November. The last time there was an increase in the 12-month rate greater than 2.1 per cent between two months was in June and July 1979 when the rate increased from 11.4 per cent to 15.6 per cent.
The exceptional events that took place in December 2008 that help explain the change in the CPI annual rate in December 2009 also apply to the change in the RPI annual rate. In addition to these exceptional events there was also significant upward pressure to the change in the RPI annual rate from housing. Within housing the main upward effect came from mortgage interest payments which rose this year but fell significantly a year ago when most lenders passed on the one and a half point decrease in the Bank rate. The next most significant upward effect within housing came from house depreciation, which rose this year but fell a year ago reflecting movements in the Department of Communities and Local Government’s smoothed house price index that is used to calculate this component.
RPIX inflation – the all items RPI excluding mortgage interest payments – was 3.8 per cent in December, up from 2.7 per cent in November.
As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate in November was above the provisional figure for the European Union. The UK rate was 1.9 per cent whereas the EU’s as a whole was 1.0 per cent.
A public consultation of a proposed change to the measurement of Mortgage Interest Payments within the RPI is currently underway. A link to further details on the proposal and the consultation process can be found within the 'Related links' section above.
The next publication date is 16 February 2010.
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. Prior to 10 December 2003, the CPI was published in the UK as the harmonised index of consumer prices (HICP). 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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Consumer Price Indices (CPI) Press Release