UK Inflation Falls—and a Puzzle

The UK’s February inflation figures were good, showing a drop in consumer price inflation from a below-target 1.9% to even further below target at 1.7%. If the squeeze on real wage growth had not already ended – as I think it had – it is clearly on the run now.

Inflation has not been this low since the depths of the crisis, and then only briefly. Goods inflation, at 1.2%, is behaving but service-sector inflation, traditionally the driver of above-target UK inflation, has also come down and now stands at just 2.4%.

The drop in inflation is really quite pronounced. Only last June it stood at 2.9% and as recently as September 2011 it was more than 5%. It looked more sticky than it has turned out to be.

There is a puzzle in these figures. RPI inflation slipped, but only from 2.8% to 2.7%, and is a full percentage point above CPI inflation. It has been boosted by rising house prices. But the CPI measure which includes owner-occupiers’ housing costs, CPIH, showed a drop in inflation from 1.8% to 1.6%.

The answer may be in the method of calculation. RPIJ, using a different method – Jevons – similar to that used for CPI, has inflation at 2%. The RPI, while widely-watched, is no longer regarded as a national statistic, though it will allow some to claim real wages are still falling.

The broad message is that inflation is falling and has made a rare excursion into below-target territory. The hope has to be that it will last. More here.

This piece is cross-posted from with permission.