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Economy in Brief

Inflation in the U.K. Declines in October
by Louise Curley November 18, 2008

The United Kingdom released inflation numbers today.  The acceleration in inflation in the previous months came to a halt in October.  The official measure, the year- to- year percent change in the consumer price index, fell to 4.5% in October from 5.2% in September.   The core index, which excludes energy, food, alcoholic beverages and tobacco, fell to 1.9% in October from 2.2%.  The year- to- year change in the retail price index, which until 2003 was the official measure of inflation, fell to 4.2% in October from 5.00% in September. The three measures of inflation are shown in the first chart. 

Except for the last two months, the inflation rate as measured by the CPI has been lower than that measured by the RPI largely because of the exclusion in the former and inclusion in the latter of mortgage interest payments and other housing related costs.  Until June of this year the exclusion of these items tended to lower the CPI inflation rate, but since then it has added to it, as can be seen in the second chart.

The declines in the various measures of inflation were due largely to the declines in the prices of food and oil that affected the indexes directly and declines in the prices of  base metals that affected the indexes indirectly.  The declines are likely to continue, if not intensify, as world demand continues to fall.  Longer term, however, the current fiscal and monetary policies being pursued by the developed and developing nations should help to avoid deflation such as engulfed the globe in the thirties. ( If, indeed, they do not lead eventually to a resurgence of inflation.)  As an illustration of the course of inflation and deflation in the twenties and thirties of the last century, we use the changes in the consumer price index for the United States, the series, PCUN67, found in the Haver Analytics' USECON  data base.    

UNITED KINGDOM INFLATION RATES  Oct 08 Sep  08  Oct  07  M/M Chg Y/Y   Chg 2007 2006 2005
Consumer Price Index (Y/Y % Chg) 4.5 5.2 2.0 -0.7 2.5 2.32 2.33 2.05
Core CPI Index (Y/Y % Chg) 1.9 2.2 1.5 -0.3 0.4 1.69 1.30 1.51
Retail Price Index  (Y/Y % Chg) 4.2 5.0 4.2 -0.8 0.0 4.27 3.19 2.83
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