British inflation receded a bit in December, slowing to a 4.2% annual rate thanks to falling fuel prices and the fading effects of the early 2011 value added tax (VAT) hike.
Exhibit 1 shows how each category of goods and services contributed to the overall rate. Falling fuel prices are evident in transport costs, which slowed the most. Slower increases in clothing demonstrate the higher VAT’s waning impact—some firms began increasing prices before the higher tax took effect, and these early hikes are now dropping from year-over-year comparisons. This phenomenon should increase over the next couple of months, as the VAT-related price hikes continue falling out of the annual rate, and the inflation rate will most likely continue declining over the period ahead.
This should be positive for the UK ’s economy. Slower inflation should help boost real disposable income (disposable income adjusted for inflation, which has been negative for several months), easing the strain on British consumers looking forward. It also gives the Bank of England additional flexibility as they consider future monetary policy moves.
Exhibit 1: December Inflation Detail
Source: Thomson Reuters, as of 17 January 2012.
(Figures may not sum due to rounding)
